I Think They Get It Now, Part Cinque: Italy

Jump to other parts of this series: Intro, France, Germany, UK, Japan, and Canada.

In any discussion of foreign affairs the same list of powerful countries have been bubbling up for decades, if not centuries. The order often shifts, but the countries themselves tend to hold on: the United States, Russia (aka the USSR), Japan, the United Kingdom (aka the British Empire), France, Germany (aka Prussia). There’s also a secondary list of largely regional powers: Iran, Turkey, India, Mexico, Brazil, Argentina and Sweden. Israel, Korea and Pakistan are relative newcomers to the second list while China has graduated from the latter list to the former.

One country that most don’t spare thoughts for, however, has been one of the world’s top ten economies ever since humanity developed sufficient command of statistics to come up with the list in the first place. That country is Italy, and it is about to crash back into the world as a significant player.

But first, it has to…crash. Hard.

Contemporary Italy is beyond dysfunctional.

  • The country is flat out broke — only Japan and Greece have national debts that are higher in relative terms.
  • Its banking sector is arguably the most overextended in the world, with a relative weight of bad loans that is eighty times that of the United States at the height of the subprime crisis.
  • Unemployment is at a level that would spawn riots in the United States.
  • The birthrate collapsed thirty years ago and never recovered. Its population is one of the ten most rapidly aging on the planet, and already well past the point of meaningful recovery.
  • The country’s current pension overhang is already among the worst in the world, and that before the Italian Baby Boomer generation even begins to retire.
  • Italy suffered greatly during the European financial crisis and its economy hasn’t seen appreciable growth since 1998.
  • Citizen trust in government is so low as to barely register in opinion polls.

And the political situation is an utter circus, complete with actual clowns or, more accurately, a populist comedian but you get the idea. The Italian equivalent of the Republicans and the Democrats have been gutted to the point of extinction, being displaced by an alliance that could only happen in Italy: a pair of parties that most closely resemble Texan secessionists (the Northern League) and Bernie Sanders…if Bernie Sanders was a career comedian who used a lot of racist jokes and opened rallies with the song “America-F*** Yeah” (the Five Star Movement).

What’s the way forward here? There isn’t one, except national collapse. Italy as a modern political economy is already over. The only reason it has not passed into history already is that it is lashed into the European Union. There are many structural issues embedded within the European system that could bring the entire edifice down. The United States withdrawing from the global order is one. The death of Italy is another. Weighing in at over $2 trillion dollars, the Italian system isn’t too big to fail — it is too big to save.

But from the rot of the current system, from the end of a Europe that is united and free, something new is about to arrive. Or perhaps it is more accurate to say that something old is about to return.

The Italian core territory is unlike anything else in the world. The Po Valley is a rich land with a perfect climate nearly encapsulated by some of the world’s most rugged mountains. The Po’s entire northern horizon are the European Alps. Even with today’s technology and centuries of infrastructure building in what was until very recently the world’s richest continent, the Alps still remain a massive barrier to communication, much less armored columns. To the south the Apennine Mountains of the Apennine Peninsula are certainly less imposing, but the utter lack of large chunks of flat land (and the fact that southern Italy is a peninsula of peninsulas) make it both a non-challenge to the economic and political supremacy of the Po as well as an at best imperfect invasion route.

In the Po’s near neighborhood there are no meaningful threats. To the north — across the Alps — are Switzerland and Austria, a Germanic pair of countries far more concerned with issues on the Northern European Plain than in the Po. To the east are the minor and often failed states of the Western and Southern Balkans: Slovenia, Croatia, Bosnia, Serbia, Montenegro, Macedonia, Kosovo and Greece. None of which — individually or in concert — can hold a candle to Italy’s economic heft, and none of which — individually or in concert — pose even a modicum of a security threat. (If anything, their bickering chaos provides Italians with a massive strategic buffer.) To the south across the Mediterranean is Northern Africa, a region that has not posed a meaningful danger to Southern Europe since Christopher Columbus was a teenager.

That just leaves its western neighbor, France. The Italians may have some differences of opinions with the French, but since the Franco-Italian border is a chunk of the Alps and the Po’s window on the world lies far to France’s east via the Adriatic, it is rare for the pair to butt heads. Add in a moderate sized navy of moderate skill — which the Italians have — and the Po is if anything more secure than the United Kingdom.

And that’s how we must think of the Po — as an island. Separate from Europe, separate even from the rest of Italy. Within that distinction lies the Italians’ future.

In the world before World War II the Po Valley was one of, and at many times the, economic powerhouse of the both Europe and the Greater Mediterranean. Its physical separation and inviolability made it the logical location to broker deals, to install infrastructure central to the economic health of the broader region, and to serve as trade middlemen for everything that mattered.

Part of the attraction of the Americans’ installation of a global security order was that geography mattered less, so countries with often-compromised geographies could shine — in many cases for the first time. For the Po Italians whose geography was their ticket to centrality and wealth, this sort of sucked. Had they not been on the wrong side during the war and not already been issued an opinion on the matter, they may well have sat out membership.

As the Bretton Woods order expanded, as the European Continent unified under the aegis of the European Union, as stability spread, what made the Po special became less so. Italy as a whole saw its position slide. With the end of the Cold War the Po is little more than a rich backwater. Italy as a whole hasn’t seen meaningful economic growth in nearly two decades, and its end is nigh.

But Trump’s actions at the G7 indicate that the system that has so enriched the rest of the world and so stabilized Europe — in part at Italy’s expense — is at its end. Remove global stability, remove the European Union and NATO, break the supply chains that supply the global system with everything from cars to crude, and all of a sudden the Po’s island-but-not-an-island geography combined with its relative centrality makes it the place to be.

So what kind of place will the Po become? What does it have to offer?

First, a step back to frame the discussion:

Just as the Po Valley and “Italy” are not the same thing, the Po Valley itself isn’t one place. The cities of Northern Italy in many cases have identities and histories just as distinct from one another as full-blown European countries. Verona, Trento, Parma, Bologna, Milan, Venice, Turin, and Genoa were all independent players from the fall of the Roman Empire right up until Italian Unification in the 1870s. That means they only rarely act as a unit, and the emphasis of all things Italian has always been on diversification and differentiation.

In the world of energy it means the Italians maintain one of the most varied set of refineries in the world, able to take in any crude stream and process it into any end product. Today Italy boasts roughly double the refining capacity they need. Toss in the sort of economic adjustment that comes from state collapse and dollar to donuts the Italians’ surplus capacity will soon make them the largest source of available refined product within three thousand miles in a world where energy security for most is a long-faded dream.

In the world of manufacturing it means the Italians make things a bit differently. For Italians wares are not about assembly lines or efficiency — that requires economies of scale and integration. The Italian cities compete with one another instead. They don’t share. They keep all the steps in house, so it is all about expression and perfection. The sort of long, gangly, multinational supply chains that can only survive in a world of stability and global market access are not the sort of things Italians do well. Think Fiat. So instead of mass producing serviceable items, the Italians hand-craft products that could easily be mistaken as art. Think Lamborghini and Versace. That sort of “manufacturing” does just fine when the world falls apart.

The problem with this machinery-as-art model is labor. It literally takes a lifetime to train a Ferrari craftsman. It is something the new manufacturing techniques that are sweeping the American industrial space cannot integrate into. The Italians don’t hate immigrants for simply the standard religious, ethnic and economic reasons, but also because immigrants simply cannot help with the problem the Po faces.

Nor is this new. Nor is it constrained to outsiders.

The Po Valley versus Italy’s south is a study of polar opposites; the Po’s sophistication and productivity contrasts sharply with the statist rot, civil breakdown, organized crime, and poverty of the South. Between unification and 1940, southern Italians moved en masse to work in northern factories. This was at a time when Northern Italian sentiments toward many in Southern Italy was racist in a generous sense. Even Mussolini’s son-in-law is said to have privately mused that perhaps it would have been better to be born a Jew than a Sicilian in Fascist Italy (against the backdrop of the Holocaust, no less). Today, the south’s population is smaller, older and sicker relative to the north than ever before. It is already on the ragged edge of failed statedom, and northerners fear southern in-migration nearly as much as they resist boatloads of migrants from Africa.

Northern Italy doesn’t need Southern Italy for anything in the traditional sense: labor, market, capital, technology, food, even strategic depth. What the Po does need is free access to the Mediterranean for oil inflows and trade outflows (and perhaps the refineries that dot the southern coastlines). It needs Southern Italy to be in a box that also contains the Southern Italians and blocks would-be migrants from the world beyond. It needs to be able to treat the south as an occupied territory.

There’s really only one governing system that can fit that bill: Fascist. Again, this isn’t new. Fascism was well established in Italy a decade before Adolf Hitler’s rise to power in Germany for much of the same reasons.

Assuming the Italians of the Po can constrain and contain the Italians of the south, there is little need to venture further out. The Po will again become the lynchpin between the Middle East and Africa on one side, and Europe on the other. The Italians’ very lack of strategic ambition makes them the perfect middleman. About the only weakness in such a system is ensuring sufficient inflows of crude so that Italy can be a large refining center. There’s nothing new here either: The Northern Italian cities have been brokering deals with whoever controls the Eastern Mediterranean for the commodities of the day for over a millennium.

To paraphrase an old European saying: Italy is dead. Long live Italy.

I Think They Get It Now, Part Four: The UK

Jump to other parts of this series: Intro, France, Germany, Italy, Japan, and Canada.

The United Kingdom has been the United States’ firmest and most capable ally for over a half century. As such many often think of the British Prime Minster as a sort of Washington Whisperer. The Brits, so the thinking goes, are a civilized people who can bring the oftentimes erratic Americans around to a saner course of action.

As one of the United Kingdom’s great statesmen, Winston Churchill, famously put it: “You can always count upon the Americans to do the right thing… after trying everything else.” The quote is as much an homage to the immense power of the United States, as it is to the trademark patience, dry humor and stiff upper lip of the English.

And so it is with no surprise that many world leaders have called upon British Prime Minister Theresa May to intervene on humanity’s account with U.S. President Donald Trump. But it is no surprise to me that she has done nothing of the sort. Nor will she. It is all wrapped up in why the United Kingdom is a major power in the first place.

The United Kingdom matters not simply because Great Britain is an island, or because the Kingdom has the naval power to defend its island, but because the Kingdom has sufficient naval strength to project power well beyond its island. That enables the Brits to pick the time and place of the conflicts they choose to engage in. Even if they choose poorly, they can always pack up, sail away and try again later. Clashes that leave most in ruin at most force an early election in the Kingdom.

There are only two things that could undo this strength. First, the United Kingdom’s flexible strength could be overwhelmed by a more powerful navy. Since the only Atlantic Ocean navy that is more powerful is the American Navy, this is a low risk. Second, the United Kingdom could for whatever reason find its navy degraded to the point that it can no longer project power. And that is precisely the challenge facing the United Kingdom today.

Ironically, painfully, the UK’s current naval weakness comes directly from an attempt to generate strength.

It is difficult for any student of global strategy who is not willingly blind to ignore the role played by the American supercarriers. The Nimitz class carriers are not simply the largest combatants ever floated, as a rule they pack at least seven times the combat capabilities of any rival naval vessel – including the largest carriers floated by other countries. The Nimitz ships have enabled the Americans to project power not just anywhere on any ocean or coast, but in most cases several hundred miles inland as well. Without nuclear weapons they are the most powerful conventional weapons systems any country has ever fielded, and just one of them if nuclear-armed has more firepower than the entire military of France. (No, that is not a France slam. The supers are simply that cool.) The Americans have ten of them. The combined rest of the world? Zero.

So long as the Nimitz carriers (or their soon-to-be successors in the Ford class) are the top shelf of military capacity, anyone seeking to oppose the Americans has to find a way to push the Americans at least a thousand miles away from shore (ergo why the Chinese are so heavily invested into long range anti-ship missiles). And should any naval power seek to ally with the Americans, they will always be entirely in the shadow of the massive, raw American power that the Nimitz ships provide. So long as the Americans are the only people with fully-operational supercarriers, no one but the Americans gets a vote as to how the Americans and their allies perform global strategic policy – even if you are one of the allies.

There are a lot of non-blind students of global strategy in the United Kingdom, and about two decades ago they all came to the same conclusion: if the UK is to matter at all, we must have our own supercarrier. And since, like any other vessel, ongoing refits are part of the process, we must have at least two. The end result was the launching of the Queen Elizabeth carrier program. Weighing in at 65,000 tons displacement they will be the largest combat ships ever floated with the notable exceptions of their inspirations: America’s Nimitz and Ford classes. Fully operational, they will give the Brits exactly what they are after: a seat at a table for two, the only table that matters. When the first ship of the new class started sea trials in December 2017, a veritable army of bubbly erupted at Whitehall.

Just one problem. The Brits screwed it up a little bit.

Maintaining weapons development systems over multiple decades and multiple administrations is difficult. In the time since the plans for the Queen Elizabeth class were first floated, the Brits have had a dozen elections and five prime ministers (and unless my political tea-leaf reading has gone completely off the rails, they’ll have a sixth before long). With each change of leadership there is a change in priorities, and oftentimes life rudely intervenes. Financial crises of the Asian, European and global kind have competed with the British Navy for resources. The Iraq War, the Afghan War and the Libyan intervention ruthlessly pulled British defense prerogatives away from the sea and towards land. The Joint Strike Fighter development program has gone egregiously, criminally, hilariously over budget.

At each step the Queen Elizabeth carrier program had to re-justify itself and fight for funding anew. In the process the Brits found themselves forced to mothball their existing jump carrier fleet in total in order to funnel resources to the new supercarriers’ construction effort. The Brits had to transfer their navy aircraft, pilots and flight crews to the U.S. Navy in order to maintain any hint of naval aviation capacity. And now, with Brexit looming, they’re having to slim the rest of the naval force to keep their supercarrier program on track.

Which means the Brits no longer have sufficient ships to protect their new supers once they are fully operational.

Carriers are not just massive and massively capable combatants, they also represent years if not decades of investment into equipment and personnel, and while they cannot be sunk easily, sunk they most certainly can be. As such every carrier is but the nucleus of a battle group, with all the other vessels’ primary purpose to ensure the carrier does not sink. The British Navy has atrophied so much for so long that it can no longer assemble two credible battlegroups and still defend Great Britain itself.

For the Queen Elizabeths’ deployments, this is nothing short of a Charlie Foxtrot. The new British supercarriers dare not venture further away from shore than the reach of British air power, whether that air power be launched from the United Kingdom itself or from the territory of a trusted ally. Support ships can certainly be built up more quickly (and cheaply) than the supercarriers themselves, but ships don’t grow on trees. This will be the state of the British Navy for at least a decade. Probably two.

This presents London – the naval power par excellence of earlier eras – with a galling choice:

  1. Abandon all hope of ever projecting power, and treat its shiny new supercarriers as the same sort of idiotic chest-beating paperweights the old Soviet “carrier” was,
  2. Fold its supercarriers into the Americans’ battle groups and de facto merge with the United States on all strategic policy… and hope against experience, culture and hope itself that the Americans will listen to your strategic opinions because you contributed a couple big boats.

The decision has already been made. The Brits know better than to fly solo, and they certainly know better than to fly solo against the Americans. The key memory is the 1956 Suez Crisis.

At that time the Brits were certain when the Americans said under the Bretton Woods system all the empires would be disbanded, that it didn’t apply to the British Empire. The British assault on Egypt inadvertently forced the Americans to choose between maintaining the British Empire and their own new global order. It wasn’t a hard choice. The result was strategic castration – with the Americans using all their ample political, financial and military strength to force the United Kingdom into a permanent, subservient position within the alliance that has lasted ever since.

To underline how annoyed the Americans were, they also forced the Brits to stick to the letter of the deals signed to support the United Kingdom against Nazi Germany in the early days of World War II before the Americans themselves were involved. The terms of such loans were so onerous that the Brits didn’t finish paying them off until the 2000s.

And so the Brits have no choice but to stiffen that lip and march forward into the very much known.

  • They will seek a direct bilateral trade deal with the Americans in order to replace the European Union at the core of their economic strategy. It may have fewer regulations, but it won’t enable the United Kingdom to be as wealthy as they have been, and the Americans will offer few concessions because the Brits are economically and strategically without options.
  • They will surrender the financial centrality of London to New York City either as part of the trade negotiations in the hopes they can glean a few concessions on other topics, or because without a firm Brexit deal the financial sector will up and leave London anyway.
  • Should the Trump administration manage to extract a final NAFTA deal from the chaos of the current negotiations, the Brits will grudgingly sign on knowing full well that direct competition from Mexico will do to the United Kingdom what Team Trump says Mexico has done to the United States. The alternative is to be a forgotten side deal only tenuously linked to the American market.
  • And no matter what military adventure the Americans go on, the Brits will be there. They know better than anyone it is far better to be in the Americans’ shadow than in the Americans’ way.

Put simply: what Trump wants, Trump gets. It’s that simple, because if the goal is security and stability for the British people, there is no other option.

This might sound humbling, horrible even. But it really is not. So the Brits don’t matter strategically on their own. They are still safe. They are still wealthy. With the world crumbling down there are worse sides of history to be on than being an adjunct to the Americans. And isn’t it the fate – if perhaps not the goal – of most parents to eventually move in with the kids?

I Think They Get It Now, Part Drei: Germany

Jump to other parts of this series: Intro, France, UK, Italy, Japan, and Canada.

You may have noticed, but the Germans lost the world wars. Ever wonder why? The obvious answer is they started a two-front war, but the truth is more basic.

Germany sits in the middle of the Northern European Plain (NEP), a stretch of flat, arable, temperate, well-watered, densely-rivered territory that comprises most of the rich parts of Europe. It is a great place to craft a successful ethnicity, polity, economy and state. With one exception: Germany sits in the middle of a plain. Germany doesn’t have much in terms of defensible borders.

As big as Germany is, the Germans will never enjoy a quantitative advantage over their collective competitors so their only option is to be better at, well, everything: infrastructure, education, planning, financing, manufacturing, and so on.

But there are no secrets in Europe. The high productive capacity of European farmland means the whole region was the first in the world to urbanize. Combine a dense population footprint with an agriculturally rich zone like the NEP, and French cities and Dutch cities and Polish cities and Danish cities are so close to German cities that everyone’s noses are perennially in everyone else’s business. Germany cannot hide how good they are. Make anything as big as Germany as efficient as Germany and its mere existence is interpreted by everyone as an existential threat, prompting a pan-European alliance that tears it down.

Germany can deal with this in two ways. Option one is to hope against hope that no one will come for it in the night. Every time that do-nothing strategy has been chosen, Germany eventually suffers cataclysmic defeat and dismemberment. Option two is to attack first, trying to defeat its rivals in sequence before they can overwhelm Germany. Every time that strategy has been chosen, Germany eventually suffers cataclysmic defeat and dismemberment.

Unfortunately for the Germans, they live in a geography that actively discriminates against successful long-lived countries.

But the post-World War II world is different from what came before. In the bad ole days the imperial powers (Germany included) duked it out in a more or less continuous march of often-multisided wars. Trade among the empires was kept deliberately curtailed because trade with today’s friend could quickly devolve into dependency upon tomorrow’s enemy. Germany’s perennial quest for superior quality was harnessed for military purposes, and the Germans kicked some serious ass. From unification in 1871 on, the Germans inflicted triple or more the casualties on their foes than were inflicted upon them. The marrying of such a deliberately fractured international system to the rising industrial technologies to Germany’s penchant for perfection brought us to the inevitable horrors of World War II.

At war’s end the Americans bribed all the expeditionary powers – wartime allies like the United Kingdom and France and wartime foes such as Japan and Germany – to be part of its Bretton Woods alliance. The rivals who had caused the war were now clustered under American strategic leadership. The most successful of those powers were those able to refabricate their systems to fully take advantage of a world of open borders, of a world where the Americans provided free security for all, of a world where all the expeditionary powers were aligned, of a world where trade wasn’t something to fear, but something to embrace.

No one did it better than Germany.

Because Germany was defeated, the Germans had the advantage of a clean slate. The ancien régime wasn’t simply removed, it was executed. The allies imposed a new constitution (the Germans know it as the Basic Law) which established a number of legal roadblocks to keep extremist parties away from decision-making power.

But the real transformation was in German industry. After centuries of treating the German military as its first and most important customer, having the option of investing in, well, Germany, was a bit of a treat. Germany’s penchant for efficiency and organization was no longer directed to service the needs of the SS or the Wehrmacht but instead using the best technologies of the day to rebuild a country from scratch. Energy shortages became a thing of the past. The result was one of the fastest stretches of economic growth in world history. (Note: We are talking about West Germany here. Soviet-dominated East Germany was a hot mess.)

As West Germany-the-country was rebuilt, it was only one small step to West Germany-the-export-machine. Germany’s position in the middle of the Northern European Meat Grinder meant Germans had long been used to deferred gratification. Their savings tended to get funneled not into personal consumption, but instead into state-centric investment plans that typically had at least a heavy dusting of military purpose. But with the Nazi regime gone and the rebuilding largely completed, Germany’s (in)famous efficiencies were no longer applied to tanks or planes or rail lines or smokestacks, but instead to export goods such as automobiles and chemicals. West German exports were highly sought after the world over, largely because they were the highest quality goods humans had ever produced.

When the Cold War came to an end, the Germans advanced from what had been the greatest era of its existence to something even better. The two Germanies reunited. Germany gained access to a dozen new oil suppliers. The former Soviet satellites to Germany’s east and southeast all joined NATO and the EU. Instead of being a front-line state, Germany was now surrounded by allies and partners who were all members of the American-secured global structure. Defense spending plummeted with the savings poured into making Germany an industrial behemoth.

Simultaneously, the rise of the euro fused the European space together under German economic leadership. Even the weakness of some of the euro’s members – most notably Italy – helped Germany. With Germany in the same currency zone as moribund economies, the price of the Euro was weaker than a purely German currency would have been. German exports no longer merely competed on quality, but also cost. A second Golden Age dawned.

It was too good to last. Since 1992 the Americans have been pulling away from maintaining the global order that is so central to German peace, success, wealth and unity.

The first hot point for the Germans in this scared new world involves the Russians. The whole idea of Bretton Woods was to fence in the Russians. If the Americans walk away from Bretton Woods, Russia is not only no longer the bugaboo, it becomes a potential partner in a never-ending multi-sided balance of power game. And nearly anytime anyone has thought of the Russians as a partner, a bit of a scrap has eventually ensued between Moscow and Berlin.

The second point involves Europe. The European Union is able to exist because the United States keeps the European countries safe from both outside powers and one another. Germany is the EU’s economic heart and Germany is an export-oriented economy, which makes every other EU state integrated into German supply chains export-dependent systems as well. Remove American security overwatch and the whole thing comes crashing down (assuming other European issues such as the euro, sovereign debt, bad banks, terminal demographics, refugees, and so on don’t tear the Union down first).

It should come as no surprise that German Chancellor Angela Merkel’s dominant emotional state these days seems to be exasperated resignation, and why the key word from her post-G7 summit communications was “depressing.” There is absolutely no way forward here that works out well for Berlin.

But inaction is not an option, and so Germany once again faces the inevitable clash between strength and fear. The Germans under the Bretton Woods regime were able to have global economic reach without corresponding military reach. Strip away that feature, and the Germans either need to massively deindustrialize so that their economy matches their current military power, or they need to massively re-arm so that their military can sustain their current economic power. In times past the first option generated the 30 Years War, the Great Depression, and the near collapse of European civilization. In times past the second option generated the Nazis, the World Wars… and the near collapse of European civilization.

Which is a roundabout way of me saying that I think the Germans will end up trying something a bit different. They don’t currently have the military required to look after their own interests, and they don’t have an economy that is sustainable without someone powerful looking out for them. What they do have is a few neighbors who find themselves in hauntingly similar situations, many of which are also tied into pre-existing and most certainly non-military German manufacturing supply chains.

Courtesy of Bretton Woods, NATO, the Soviet collapse and the euro, there is an arc of countries that have broadly the same top-level concerns as Berlin: a crumbling European system, a supply chain model dependent upon extra-European end consumption, a concern about large-scale refugee movements, a shortage of local energy resources, and above all a resurgent Russia.

  • Poland, the Czech Republic, Hungary, Slovakia check all the above.
  • Estonia, Latvia, Lithuania, Sweden, Finland and Denmark check all but the supply chain issue.
  • Belgium, the Netherlands, and Austria check all but the Russia issue.

The first two bullets suggest a Germanocentric NATO in miniature. The latter two bullets suggest a Germanocentric EU in miniature (perhaps selling military goods to the Germanocentric NATO?).

Neither is likely to last the test of time. Russia’s demographics are so horrid that it is unlikely to be a long-term problem and nothing kills an alliance like the lack of an enemy. Any revised supply chain system still needs a market, and once war-related demand fades, what then? And a Germanocentric system of any type is certain to attract the gentle crowbars of the French, British, Russian and Turkish diplomatic services within minutes of getting going.

Compared to the long dark of Germany’s past, the possibility — however impermanent — of a third way between near-pacifism and a raging war machine is a surprisingly upbeat future. Merkel has presided over the best years in German history. What’s in front of her with a bit of luck just might be brighter than the German norm.

I Think They Get It Now, Part Deux: France

Jump to other parts of this series: Intro, Germany, UK, Italy, Japan, and Canada.

French President Emmanuel Macron is a bit aggravated these days. He went out of his way to court a personal relationship with U.S. President Donald Trump with the belief that chumminess would enable him to tilt American policy decisions. Between the Iran nuclear deal, steel and aluminum tariffs, the Paris Climate Accords and now the G7 debacle, Macron has learned otherwise. Social lubricant in international politics can be important, but it rarely trumps policy and national interests. The Americans have shifted from an alliance-based to a transactional foreign policy, and a parade followed by a firm handshake and a nice dinner just isn’t strong enough currency.

So, atmospherics aside, let’s talk about the French strategic position.

The French think of the European Union as theirs, and with good reason. They are, after all, the people who made it. With the end of World War II the Austrians, Germans and Italians were occupied, the Low Countries were rebuilding from rubble, the Swedes and Swiss were neutral, the Spanish were languishing under a local despot, and all Central Europe was locked away on the other side of the Iron Curtain. The strategic competition that had dominated the past millennia of European history was on hiatus, and the French found it almost too easy to force their political will on a shattered continent. And so Paris pulled together Italy, Germany, the Netherlands, Belgium and Luxembourg to create the European Coal and Steel Community, which a dozen treaties later evolved into what we now know as the European Union.

But for the French it was never about economics. The French metropolitan territories are rich. Phenomenally productive farmland. A wealth of inhabitable climate zones. Great rivers for industry and internal transport. A population far younger and aging far more slowly than the European norm. The French economy has always been held mostly in house, and the Cold War era was no exception.

France also boasts easy access to the North Sea, Atlantic Ocean and Mediterranean Sea, giving France – and France alone – fingers in every pot that matters to Europe. France’s position near the westernmost extreme of the European Peninsula even grants it good strategic depth, even if that “depth” belongs to other countries.

French strategic isolation freed up French defense planning to focus on the far horizon, as evidenced by France’s nuclear aircraft carrier and nuclear missile force. Nearly alone among the European states, the French do not need someone to defend them. It all means that the French didn’t really see a huge attraction to the Americans’ Bretton Woods plan.

The French know full well that should the Americans walk away from Bretton Woods, the global security that enables the European Union – which is at heart a union of exporters dependent upon global access – would no longer be possible. That obviously upsets Macron, but it doesn’t overly hurt France. Just as the Americans designed the world order for strategic reasons and so never lashed their economy to Bretton Woods, the French designed the EU for strategic reasons and so never lashed their economy to Europe.

Any global breakdown, even a European breakdown, is one that France can survive without the sort of catastrophic and transformative economic, political, cultural and strategic shocks that will so ravage almost everyone else.

France also faces no meaningful strategic challenges in the near- or mid-term. It is far enough away from Russia and Turkey to avoid complications from their expansions. Its position on refugees is so hostile that few try to go there. Its neighbors are militarily inept, demographically imploding, horrifically dependent upon America’s global trade and security strategy, or in most cases, all the above. In contrast, outside of the United States and the United Kingdom, it is the French who have the longest and most active history of engaging in military interventions. French forces are capable, experienced, professional, not at all in danger of rusting on the shelves, and when they go in, they go in hard – even in places such as Sub-Saharan Africa where the Yanks fear to tread.

That more or less dictates that in a world without the Americans running things, France is by far in the best position of any country on the planet (besides the United States itself) to chart an independent course. Macron isn’t hopscotching around the world (just) because he is a megalomaniac on an ego trip. He is doing it because he represents a waking superpower, because the world that is shaping up is a world in which France will shine, because he’s laying the foundation for France to once again be an imperial power.

No wonder Macron has been so combative with Donald Trump of late. Not only does his country have the most insulation from any meaningful trade conflict, his country is by far in the best position to do well should it all fall apart.

One of the beautiful things about having a strong national system with no international dependencies or exposures means that you can choose your battles rather than having them chosen for you. France will become a free actor at heart. That makes it somewhat difficult to suss out precisely what the French will go after, but there are three themes worth considering.

First, the French have to have a German strategy. The French have fought multiple wars with the Germans over the years and most of them… have not gone particularly well. The combination of Bretton Woods and the European Union enabled France to both defang the German military and harness the German economy to serve French strategic interests. It has been a happy time, but it is nearly over – which means Paris now needs to figure out a way to either re-harness Germany, point it firmly in another direction, or both. A rumbling Russia intent on re-securing its outer periphery before demographic collapse turns it into a brittle shell provides opportunities for both options simultaneously.

Second, the French need a Western Mediterranean strategy. As the only Northern European country with a Southern European foothold, the French have a unique capacity to leverage the capital, industrial and population densities of Northern Europe into a region that doesn’t have a whole lot of capital, industry or population. (France’s most important imperial territories were in the Mediterranean basin for good reason.)

There is a great deal more opportunity than danger for the French here. Italy and Spain and Portugal may be European, but projection-based powers they are not. With the EU on the ropes and likely soon to be gone from this world, France quickly becomes first among not-even-close-to equals and will be able to use its superior capacity to shoehorn the Southern European trio into any container it wishes. France already enjoys solid relations with Morocco and Tunisia, and while French-Algerian relations are reliably testy, in a post-American world Algiers will have no reliable partners aside from their former imperial overlords. Libya even presents an opportunity for a French state-building effort which, courtesy of Libyan oil, might even pay for itself.

Success in the first two strategies requires a third strategy: that of temporary alliance. There will be conflicts of interest constantly not only with Germany and Algeria, but with countries one step removed: the United Kingdom, Turkey, Egypt, Israel, the Netherlands, Sweden, Russia, even the United States. All will maintain capacity to get in France’s face, and yet all will prove to be tactical allies based on the issue of the moment. Securing such temporary alliances is a French national specialty, but a flair for dealmaking does not mean France will be able to leverage those positions into something greater.

Projecting power beyond your home region requires reach, access, insulation and strength. France has all of those, but only enough to dominate its front and back yard, and only then with a lot of back and forth. Moving into the Eastern Mediterranean or Sub-Saharan Africa or the Middle East, much less Asia or the Western Hemisphere requires a degree of spare capacity that France simply cannot generate unless it simplifies its neighborhood.

That could take many forms. Overcoming Algerian cantankerousness and successfully burying the hatchet would make the Western Med a French pond. An entente with merry ole London would lend itself naturally to co-dominion of the North Sea. A meaningful alliance with desperate Russia or neo-imperial Turkey would put Germany so firmly into a box that it would buy France a free hand in Western Europe. A (public) understanding with those neurotic Americans would go a very long way on everything.

But all these options require the French doing something they do not do well: act reliably and in good faith. That’s not how the French tend to function. France tilts the board. France switches sides. France abandons lost causes. France ditches allies. France extracts what it can when it can however it can because the French know they won’t be involved in any particular situation for long. France is a successful player because France is a player. As the French themselves say, “France has no enemies or allies, only interests.”

That switch-hitter mentality has served the French well for centuries, and continuing to follow the only-interests mantra will indeed enable France to reclaim its position as the first power of its region. But the constant back and forth prevents France from becoming more.

It is easy for a powerful, united nation to carve out a temporary sphere of influence in a time of global upheaval. But building something bigger, something that lasts, that requires a cleared board – and that is something that France cannot do unless it has a few allies who truly trust it.

Times of international chaos are wonderful opportunities to reset cultural norms. Emmanuel Macron’s rise to power shattered the traditional French political elite, making this an opportune time to change the French mindset on what the word “alliance” means.

Let’s see what he does with it.

I Think They Get It Now, Part I

Jump to other parts of this series: France, Germany, UK, Italy, Japan, and Canada.

U.S. President Donald Trump made a… let’s call it a splash, at the G7 summit in Canada June 9. The G7 comprises the seven largest industrialized democracies – the United States, Canada, Japan, Germany, the United Kingdom, France and Italy – who also form the core of the entire American alliance network. Their leaders and finance ministers meet regularly to discuss challenges to the global order. Normally, the G7 is a bit of a lovefest with leaders agreeing to push this bit of financial stability or that bit of poverty reduction.

This time was different. The Trump administration is busy belittling and/or wrecking parts of the international order, and a mere week before the summit the United States levied steel and aluminum tariffs on nearly all the G7 members themselves. As such the summit was preceded and followed by quite aggressive statements out of most of the G7 members, most notably from Canada and France, about how American tariffs would not be allowed to stand in specific and a general dissatisfaction with the position of the White House on global affairs in general.

In essence, ahead of the summit the G7 leaders were showing concern that Trump’s rhetoric wasn’t simply rhetoric. And in the summit’s aftermath the emotion could best be summed up as defiant despair that Trump really, truly, means what he says.

I can see why they’re all pretty bummed.

The Americans created, supported, subsidized, and maintained the global order since the end of World War II. Under that order the industrialized world in general and the other G7 countries in specific have done very well for themselves, rebuilding after the war’s devastation in an environment of absolute physical security.

Maintaining a global order is far from “normal” when viewed from the long stretch of American history. In fact, it has only been the dominant strain since the end of World War II. Before that the United States had other foreign policy themes that competed for top billing.

  • In the post-revolutionary era it was all about standing up to the established European empires, with former imperial master Britain in general triggering a near-dehabilitating mix of obsessive paranoia and narcissistic fear.
  • The competing ideology back then was that the United States should be one of those imperial powers.

Theme1 nudged the Americans into the War of 1812, and led the Americans to encourage the independence of the European’s imperial colonies throughout the Western Hemisphere. Theme2 birthed the Monroe Doctrine and set the Americans on their own pseudo-colonial drives.

But as the world – and America – changed, American foreign policy changed with it. The American Civil War and Reconstruction removed all appetite and bandwidth for meaningful foreign policy, triggering a shift to hard isolationism. Once the Americans finally had their (second) coming out party with the Spanish-American War in the 1890s, isolation gave way to a mercantile-driven dollar diplomacy where the Americans would fence off swathes of the world in a corporate-driven foreign policy designed to maximize American economic penetration. The Depression and World War I convinced Americans the world was no fun at all; isolationism came back into vogue.

The great upheavals of the World Wars left the US the pre-eminent power in every respect that matters. Over the course of fifty years, the Americans had gone from almost no navy, stealing Britain’s IP, and being a major global debtor to having the only navy, the technological edge, and to being an economic power on an unprecedented scale. The US had a choice: seek isolation once again and watch its only real competitor – the Soviets – slowly eat away at the periphery until they could challenge the US or find a way to take a ragtag group with long lists of mutual historical grievances a mile long and get them to work together. A real life Magnificent Seven.

The new idea was as straightforward as it was revolutionary: use America’s newfound and historically unprecedented economic power to pay all the previous competing powers of eras gone by to be on the same side. Any country that had any meaningful imperial presence could only do so if it also had a significant naval force. These empires’ clashes — over resources, populations and trade routes — were the root causes of nearly every significant military conflict of the entire industrial period, and they culminated into the First and Second World Wars.

In response, the Americans launched a broad system of what was collectively known as Bretton Woods, named after the location where the deals were first hammered out.

Bretton Woods provided global security for all the maritime and industrial powers, enabling all of them to access any resource anywhere at anytime safely, and then export finished goods to the American market. Bretton Woods puts all the world’s competing naval / maritime / trading powers on the same side by providing them with everything they had ever fought to attain. In exchange the Americans only demanded one thing: alliance against the Soviets.

All those purchased allies are all still powers of significance today, and it should come as no surprise that the most powerful of them now comprise the G7. All were represented at the G7 summit in Canada this past weekend.

Ship traffic around Singapore

The Bretton Woods strategy is notable in American diplomatic history in that it had no counterpoint. No other policy oscillated with it. Bretton Woods was both bipartisan and served as the norm for seven decades. But longevity and broad support are not the same thing as sustainability or permanence. The world is changed since the Cold War’s end, and now – belatedly and until now piecemeal – the Americans are finally changing with it. Trump’s foreign-policy beliefs are not a bug in the American system, they are a feature. Under Trump the Americans are firmly – finally – abandoning Bretton Woods, and in doing so flirting with all four of their pre-Bretton Woods foreign policies.

  • Trump’s hardball on NAFTA is most definitely neo-imperial. He is attempting nothing less than the forcible change of the economic structure of America’s neighbors to meet specific American structural needs. Also fitting the mold is Trump’s suggestion that Russia be re-admitted to the G7. In a post-Bretton Woods world Russia is less a foe to be contained as it is a potential partner to leverage against other competitors.
  • Trump’s position on Syria is flat out isolationist. As are many of his inklings on U.S. basing and strategic stances in Western Europe and East Asia. It isn’t as crazy as it sounds. Something that no one has ever been able to explain to me about American involvement in Syria is what-does-the-winner-get? And the idea that the Americans should defend the Europeans from Russia so that they can use Russian energy en masse has always been an awkward sale.
  • Trump’s pending trade war with China has overtones of the anti-British policies of America’s early decades. And there are more than mere echoes of the general anti-British paranoia in Trump’s overall feelings about foreigners whether they be Chinese, Mexican, Iranian or Arab.
  • Trump’s willingness to flirt with North Korea most certainly has a dollar diplomacy feel to it, and Trump has directed Commerce Secretary Wilbur Ross on a never-ending road-show for American goods… and linking potential sales to ongoing trade negotiations with, well, everyone.

Viewed through the prism of Bretton Woods all these goals and methods are inane. But viewed through the lens of anything other than the strategic environment for which Bretton Woods was designed, Bretton Woods itself is ridiculous.

It isn’t that these goals – or even methods – are good or bad. It is that they are different. It is that they better reflect America’s current situation than the Bretton Woods situation does. The Americans are done paying for alliance.

Courtesy of the G7 show this past Saturday, I think they get it now. I think America’s closest allies realize the shift in the White House is, indeed, real. I think they understand Trump is not bluffing. I think they’ve internalized that Trump’s rhetoric is the American position. I think they finally believe Bretton Woods will not magically regenerate when Trump is gone.

And that means it is high time for the allies to figure out where they fit into the scared new world that is tumbling open right in front of them.

In this series we will go through the other six members of the Group of Seven. These are the powers that the Americans co-opted to make the Bretton Woods system work. They are the countries with the greatest long-term potential to shape and re-shape their worlds. Many may be out of practice, but that is far from saying they are done with history.

This Is How the World Ends, Part V

by Peter Zeihan, Melissa Taylor, and Michael N. Nayebi-Oskoui

See Part I, Part II, Part III, and Part IV.

Event 5: Trump Unleashed (in progress)

The United States has never made foreign policy by committee.

The Constitution grants the executive broad authority and autonomy to collect information, come to conclusions, chart out strategies and implement foreign and military policy. Congress technically has oversight, but the legislative branch lost interest in and surrendered meaningful control over foreign policy over a decade ago. Within the executive branch there are no meaningful checks on the president’s powers, with all senior executive staff serving at the President’s pleasure (or, if you prefer, whim).

Trump has been pruning his executive staff quite rigorously in recent months, and the foreign affairs team is no exception.

Think back to the 2016 campaign. In the early months there were 18 people vying for the Republican nomination. Everyone assumed Trump’s campaign was a marketing scheme, so Trump got 18th pick for advisors. This landed him with disasters-in-waiting such as Michael Flynn.

Upon actually becoming president, a number of individuals from more established interests either saw an opportunity to shape a man who was obviously a neophyte and/or felt it was their duty to the country to try and advise the freshman president. This gave rise to what I’ve called the “Axis of Adults.” These are the men who wanted to make sure the country didn’t go off the rails.

The chair of the National Republican Committee – Rince Priebus – became Chief of Staff in an attempt to inject some Republican orthodoxy. Army General HR McMaster became National Security Advisor with the intent of speaking truth to power. ExxonMobil CEO Rex Tillerson took over the State Department to share the insights of corporate America. Gary Cohn climbed aboard to explain the ins-and-outs of Wall Street.

All sought to actively shape President Trump’s views. All are now gone.

Washington, D.C.

Another pair already have one foot out the door. Priebus’ replacement as Chief of Staff – General John Kelly – felt the best thing he could do to help the president was ensure accurate information delivery. That meant, among other things, taking away the president’s phone so he wouldn’t ingest bad information… and so Trump now plans his life without much consulting his chief of staff. General James Mattis – the Defense Secretary – now seems to be the only person allowed in the room with an interest in accuracy, context and consequences. It makes him a bit of a downer in adrenaline-fueled TrumpWorld, and I’d be shocked if he wasn’t excused by year’s end as well.

Bottom line: All the chaos and disruption of the past 15 months has been the result of a Donald Trump who has been actively held back. Now the world gets to see what a Trump unleashed – an America unleashed – can do.

The pace of… everything is about to pick up considerably. Between the end of the WTO and the dawning exploitation of secondary sanctions, the US is getting the free use of its other hand – its natural economic power. The Trump administration is testing America’s strength just as other major powers are hitting structural barriers, not least of which are demographic. The Americans are now only one of the few peoples that are repopulating, within a generation the average American will be younger than the average Brazilian (the Americans are already younger than the average German or Chinese). At the same time the collection of people who have repeatedly talked the president out of some of his more disruptive policies are now either gone or sufficiently discredited in the president’s eyes that they might as well be.

It isn’t so much that any individual actions taken by the Trump administration will or won’t work. It isn’t so much that there is or isn’t a grand, multi-faceted plan in the White House. It isn’t even that the president does or doesn’t understand the context or consequences of his policies. And it certainly isn’t that this is not what I would do if I were king for a day.

It is that global population patterns are dependent upon global manufactures trade to generate income, and global agricultural trade to pay for food from abroad. It is that the global transport that enables such sectors to work requires a global order.

It is that since World War II the United States has sustained the only true global order that our world has ever known.

It is that not only is the United States no longer holding the global order together, it is actively breaking it down and there is no power or coalition of powers that can even theoretically take its place. It is that a world without America is a world in which other countries – whether out of desperation or opportunity – feel forced to protect their own interests. And most are wildly out of practice, wildly vulnerable, or – in most cases – both. It’s that America’s only significant geopolitical competitors – Europe and China – have become irrevocably addicted to that order just in time for it to end.

And perhaps most worryingly, it is that the Americans’ abdicating global leadership isn’t the same thing as the Americans’ abdicating global power, or global reach.

It is that the party is over.

This Is How the World Ends, Part IV

by Peter Zeihan, Melissa Taylor, and Michael N. Nayebi-Oskoui

See Part I, Part II, and Part III.

Event 4: The World Trade Organization Loses Its Grip (in progress)

Before we talk about a life without the WTO, we need to review why it exists in the first place.

The core of the international system during the Cold War was the Americans’ support of the global trade and security order in part by stepping back from the role of global economic hegemon. In exchange, the Americans wanted strategic control over the alliance. The economic half of the American understanding was codified in a series of international negotiations in the late 1940s which created the General Agreements on Tariffs and Trade. GATT eventually morphed into what we now know as the World Trade Organization. The basic concept is that the United States – the most powerful economy and military in history – has no stronger legal standing than Paraguay or Malawi when it comes to economic matters.

The Americans’ willingness to sublimate their economic interests in exchange for security control is what enables the global system to work, and the WTO is the institution that manages the economic side of the global order. It shouldn’t come as much of a surprise that pretty much everyone plans to use the WTO to sue the United States on the issue of secondary sanctions.

No wonder Donald Trump has the organization in his sights.

The American ambassador to the WTO has made it clear that so long as the WTO isn’t furthering America’s direct economic interests – a position diametrically opposed to the original negotiation – the United States will prevent judges on the WTO’s appellate bench from being replaced as their terms expire. (The U.S. enjoys a de facto veto over procedural measures like this.) By year’s end the WTO’s dispute resolution system will shut down due to lack of judges, and that spells the organization’s functional end.

Now consider the context:

  • In the United States political and strategic interest in all things international is at the lowest level since at least the 1930s.
  • The United States economy is one of the least exposed in the world to the global system, but the Americans are the sole country with the ability to maintain that system.
  • The shale revolution has made U.S. oil production cost competitive OPEC producers, and the United States will be a net oil exporter by the end of 2020.
  • The dominant strains of political thought in both the Republican and Democratic Parties is staunchly anti-trade. Anti-trade factions have seized control of the White House in 2016, and are highly likely to dominate both sides of the Congressional aisle after this year’s mid-terms.
  • The U.S. dollar dominates the international trading system. The American administration has discovered it can use that fact to selectively punish countries for reasons wholly disconnected from trade.

It isn’t exactly a big step to say the Trump administration might choose to use secondary sanctions to selectively punish countries for other reasons.

The WTO works because the Americans have always deferred to it on economic matters. Remove that, however, and the entire global structure of anything that involves a border crossing falls back into a combination of survival-of-the-fittest and how-big-is-your-gun. For a country like the United States with scant exposure but global reach, that’s pretty good.

For anyone else, not so much.

And that’s before the Trump administration really gets going.

Next, the final installment of our series: Trump unleashed.

This Is How the World Ends, Part III

by Peter Zeihan, Melissa Taylor, and Michael N. Nayebi-Oskoui

See Part I and Part II.

Event 3 – The Chinese discover they have no clothes (May 18)

The threat of American secondary sanctions threatens the stability of more than just Iran and Europe, it also is a mortal threat to the world’s largest oil importer: China. And it isn’t like the Chinese were not already under some fairly stupendous pressure.

Two weeks ago U.S. Trade Representative Robert Lighthizer led an all-star team to Beijing to list out the Trump administration’s trade demands. Lighthizer is an old hand when it comes to brutal trade talks. He is the trade lawyer who in essence wrote the legal backbone of what is now the World Trade Organization, and during the Reagan administration he (repeatedly) brought the Japanese to heel on a raft of trade and financial issues that the Japanese blame for many of their subsequent economic troubles.

Lighthizer brought a small army of officials with him: Treasury Secretary Steve Mnuchin, Commerce Secretary Wilbur Ross, White House Economic Adviser Larry Kudlow, and America’s ambassador to China Terry Branstad. Of them, the only face that the Chinese consider even remotely friendly was Branstad – Xi’s first trip to the United States back in 1985 was to Iowa, and he and Branstad have a warm personal relationship. It was a classic bad-cop bad-cop bad-cop bad-cop and-this-guy-will-help-you-to-the-hospital-afterword set up.

Lighthizer and Co didn’t negotiate. They simply delivered some ultimatums.

  • China will unilaterally increase its imports of U.S. goods by at least $100 billion.
  • China will immediately cease protections and subsidies for any sectors related to its Made in China 2025 central economic plan, as well as eliminate tariff and non-tariff barriers on those sectors.
  • China will accept that it is a non-market economy under WTO rules (which would allow the United States to apply protective tariffs against Chinese exports).
  • China will accept American restrictions on Chinese investment-led acquisitions in the United States.
  • China will cease all technological/cyber theft as well as cease any and all policies which aim to force American firms to share technologies with China.
  • China will accept American quarterly reviews on all trade policies, and pre-commit to cooperation with American findings.
  • China will submit rosters of goods shipped to third countries so that China may not do end-runs around American import restrictions.
  • China will abandon all WTO cases it has prosecuted against the United States as regards any of the above issues and preemptively agree to launch no new ones.

The items are notable for their unprecedented nature in the post-WWII order, their depth, how they cut to the core of the Chinese Communists government’s legitimacy, how Beijing hopes to develop the Chinese economic and political space, how China hopes to project economic power internationally, and above of all, by their deadline – July 1.

 

Hong Kong, China

In “normal” relations such demands would all be non-starters and rejected out of hand. Instead, the Chinese sent their own delegation to the United States for talks a few days ago to see just how much wiggle room there might be with Lighthizer and Co. On May 18 the Chinese discovered that the Americans were actually serious.

As in Europe, local media in China is all aghast with how unreasonable the Americans are being. As in Europe, the real decisionmakers are being far more circumspect. President Xi has been deathly quiet. He and the politburo may have nationalist aspirations, but they fully realize the reality of global power ratios.

  • The Americans are China’s single-biggest end-market and the Americans import more than triple from the Chinese than the other way around. In any tariff v tariff conflict the Chinese just don’t have much ammunition.
  • The Chinese are the world’s largest exporters. Nearly all that trade is dependent upon the US dollar-denominated and SWIFT-managed trading system. Should China befall American financial sanctions the China story would crash pretty quickly.
  • The U.S. Navy has ten times the power of everyone else’s navies combined. Since World War II the Americans have used that imbalance to create a unified global system. Should that commitment fail – and it is – anyone dependent upon global trade is more or less screwed. Like, say, China. Making matters worse, nearly all Chinese trade with the rest of Asia is water-borne and therefore vulnerable.

European bureaucrats don’t get that. American media doesn’t get that. But Merkel does. So does Xi. He has to. Apparently, the U.S. Treasury Secretary has already threatened the Chinese with a SWIFT cutoff.

The biggest outcome of the Lighthizer talks to date? On May 20 the Chinese and Americans indicated they’d stop publicly threatening each other with tariffs. My read is that now that the Chinese realize the Trump administration is serious, there’s no point to beating the trade war drum because that’s a field of combat the Chinese cannot hope to win on. Best to try other methods of persuasion.

(On a side note I’m quite amused that the media is making much hay about how competing agendas in the Trump administration’s senior staff are weakening the team’s negotiating strategy, as if that hasn’t been the norm for American administrations since time began. The person most in tune with Trump’s vision is Lighthizer. You can safely ignore the rest when it comes to comprehending the United States’ bottom line.)

If the Chinese are not going to have their entire economic and political system shattered by American (in)action, they have to bring something big to the table. That something would have to be on the scale of the economic demands the Lighthizer team made. I have no doubt that the talk back in Beijing today is to come up with strategic topics than can be exchanged for continuing American largess. North Korea will certainly make the list. Cooperation with the Americans against Iran – or maybe even Russia – is undoubtedly under consideration.

But time is running short, because the American shifts against Iran and China are only part of a broader pattern.

This Is How the World Ends, Part II

by Peter Zeihan, Melissa Taylor, and Michael N. Nayebi-Oskoui

Part I is available here.

Event 2 – Europe Guts Itself (May 10)

The way the Trump administration withdrew the United States from the Iran nuclear deal has consequences, but for the most part I’m less concerned about the local fallout than I am about the ripple effects beyond the Middle East. Let’s start in Europe.

The response from the European governing institutions to the American withdrawal from the nuclear deal can be best summed up as righteous indignation.

In part this is economic: the Europeans were fast to pour investment into Iran after the deal was codified and are not looking forward to rolling those efforts back.

In part it is political: the Europeans are signatories to the deal, working long and hard to show Europe could contribute to a strategic normalization beyond their borders. No one likes it when another country simply informs you that your efforts don’t matter to them and they are imposing their own reality upon a situation.

In part it is personal: French President Emmanuel Macron was sure he had a strong relationship with Trump, and his personal charm offensive a few weeks back was intended to sway Trump to keep the Iranian deal. Such a public rebuke has to sting.

In part it is institutional: bureaucrats are supposed to ignore politics and strategy when making policy, and the folks within the European Commission (said bureaucrats) are the ones most cheesed-off by the Americans’ dictating of Europe’s economic and security policies. Commission officials have been talking of counter-sanctions against the United States, as well as offering legal and financial guarantees to firms who still want to do business in Iran.

But the politicians are singing different tunes, not just from the bureaucrats, but from one another. Macron has, as expected, been if anything even more strident than the Commission. On the other end of the spectrum, a few Central European countries sabotaged a French effort to condemn the Americans for moving their Israeli embassy to Jerusalem – in part to stick it to the French, in part because they plan to move their own embassies.

But as seems increasingly the case, the person who matters most is German Chancellor Angela Merkel. While lamenting the end of the Iranian deal, she sees bigger forces at work than “merely” the future of the Middle East. American policy evolutions/gyrations under the Trump administration have adversely affected many, but none more so than the Germans.

Brandenburg Gate, Berlin, Germany

Germany is individually powerful, but anything it does to enhance its national power tends to spark an alliance among its neighbors to tear it down – typically in a cataclysmic war. The only way the Germans – and by extension, the Europeans – have ever found around the problem is to bring in an external security guarantor who forces everyone to be on the same side. That’s the United States.

And so Merkel has watched in increasing horror as the Americans stop treating the Europeans as allies, or even partners, but instead as competitors. The prospect of American secondary sanctions must terrify the chancellor: Germany is the world’s third-largest exporter and nearly half of German goods are traded outside of the EU on markets that are managed by the SWIFT system the Americans plan to use to box Iran in. Even a minor application of American sanctions would be catastrophic to German economic and political stability.

To that end Merkel noted two days after the Americans withdrew from the Iran deal that “it’s no longer the case that the United States will simply just protect us. Let’s face it, Europe is still in its infancy with regard to the common foreign policy.”

But while her words were a call for Europe to deepen its integration, her actions indicated something very different. If the Americans cannot be trusted to put Europe first, then the Germans have no choice but to act to prevent a broad-scale coalition from containing German interests. That means courting new allies… from beyond Europe. And so after making the comments that Europe needed to pull together, Merkel didn’t travel to Brussels. Or Paris.

She went to Moscow.

Now don’t overreact. I’m not saying that Molotov-Ribbentrop v2.0 is just around the corner. What I’m saying is that even with seven decades of the most favorable strategic environment the European continent could have ever hoped for, that a meaningful strategic and political merging of the European countries still hasn’t happened. That forces the individual powers of Europe to chart their own – individual – destinies. For the United Kingdom that means Brexit. For the Italians that means a new populist government that will veto any effort to further federalize the EU. For the French that means some serious globetrotting to build up an independent strategic position.

And for Germany it means putting some irons in the fire that have nothing to do with Europe whatsoever. That means economic and energy connections to Russia. That means at least giving Russian demands a hearing. That means taking Russian strategic interests into account as concerns the countries between Germany and Russia.

OK, maybe that does sound a bit like a Molotov-Ribbentrop redux.

Never forget that the founding concept of the EU and NATO were to keep the Americans in, the Russians out, and the Germans down. All three of those pillars are gone.

History is moving on.

Next up: The Chinese discover they have no clothes.

This Is How the World Ends, Part I

by Peter Zeihan, Melissa Taylor, and Michael N. Nayebi-Oskoui

I like to say that I sell context. It’s all about how seemingly disparate things like age structures and trade patterns and political evolutions and technological advances interact. In any such dynamic system there are winners and losers. My concern is that the global system itself now faces a moment of truth in which the countries of the world, first and foremost the United States, will fail to rise to the occasion. Which is a nice way of saying that what I’m really seeing – what I’m really selling – is the end of the world.

This world system was put into place 70 years ago. The core of the international system during the Cold War was the Americans’ support of the global trade and security order. The Americans agreed to provide global and regional security to their allies in exchange for deference on security matters. When issues of economic import rose to prominence, the Americans tended to give way. When issues of strategic import rose to prominence, the Americans tended to get their way because that was the deal.

This arrangement froze geopolitics as previously independent countries were pulled into a massive, interconnected system because of not only America’s overwhelming economic and military power, but also the power of the alliance structure it controlled. This was sucha powerful force that it even pulled in America’s enemies one-by-one and allowed them to rise, fueled on exports. In the process, the US made the global economy dependent on the relatively free flow of goods, people, and money while also alleviating the need for the large militaries that defined the first half of the 20th Century. In other words, the US and its alliance shifted every global system that mattered for literally every country in the world.

Everyone except the US, which managed throughout this to remain isolated economically. It maintains its own military, largely produces what it needs (though it imports a lot of what it wants) and remains the largest economy in the world. With the fall of the Soviet Union and the end of the Cold War, just as the world began to truly bet their economies on the American plan, the American’s need for this incredibly expensive system faded. It’s taken the US awhile, but it finally noticed.

There is no replacement for US power, economic or military. “Europe” as a concept, China, and Russia are all in existential struggles and each of them is likely to lose. There is no alternate reserve currency. There is no one who can react to any event anywhere in the world like the US can. The Americans are leaving a power vacuum and we know what happens in power vacuums.

I’ve been speaking and writing about this approaching “end” for the better part of the past decade. One of the fun things – and incidentally, one of the things that helps keep me sane – is that it is all very abstract. I can blithely note that wars will happen, that supply chains will break down, that the lights will go out, that famine is an inevitability, but so long as the timeframes are fuzzy and the locations are over the horizon it is easy to speak and write with a degree of detachment. This doesn’t affect me, and certainly not right now.

I think/fear that I’m about to lose that insulation. The end is pretty god-damn nigh. Exactly how this plays out is still very much up in the air. The blow by blow will matter immensely in the short and even medium term. So I’m going to lay out the most recent big events that seem to be giving shape to the Disorder over the course of several newsletters.

Event 1: The United States withdraws from the Iran nuclear deal (May 8)

The Obama administration did not sign the U.S. up to the nuclear deal because it thought Iran would suddenly become an upstanding member of the international community. After decades of being the region’s arbiter, the American security apparatus in specific and the American public in general wanted to get out of the region. That meant the White House needed to make a choice.

Option one was to appoint a “winner.” This “winner” would patrol the region, keep the local powers in line, and in general do what the Americans had done: keep the region as stable and static as possible.

The Obama team didn’t like the candidates. Iran was out as a matter of principle. Saudi Arabia didn’t field a meaningful army, much less a navy. Israel was potent, but small, and the religious angle meant it could never lead the region. Turkey may have been capable, but it had unrelated interests in Europe and the Caucasus and the Mediterranean, and so could never concentrate its efforts on such a gangly region like the Middle East.

Even then, there was no guarantee that any “winner” would look out for American interests unless a large American military presence remained… which would defeat the point of a sustained withdrawal. And the last thing Washington wanted was to cause the emergence of a new regional hegemon that was not consistently pro-American.

That left option two: establish a regional balance of power so the region would self-regulate. This balance, ultimately, is what the nuclear deal sought to achieve: partially rehabilitate Iran, partially reintroduce it into the international system so that Iran could counter – and be countered by – the other regional players. In doing so – or so the theory goes – the region’s wars will be many, but limited.

The key selling point of the balance-of-power option was that the Middle East has so many competing centers of power that no single country would ever be able to gain a significant, long-term advantage. That would keep any of the (many) expected battles bottled up within the region. It sounds a bit cruel, but the ongoing civil wars in Syria and Yemen are good examples of the balance-of-power strategy working because those conflicts keep the region’s powers at one another’s throats.

Trump’s withdrawal from the nuclear deal does two things. First, it wrecks the balance-of-power strategy by gutting the possibilities of the region’s most active player: Iran. The resurrection of global financial sanctions on Iran will – at a minimum – halve the country’s export earnings by year’s end. This means the Americans will need a new strategy for the region. At present, the Trump administration hasn’t offered anything as to what that might be. But that is an issue for another day.

From my point of view, the second outcome of the withdrawal is far more important. The old/new sanctions on Iran uncaps what has traditionally been the Americans’ most potent economic weapon: secondary sanctions.

Secondary sanctions are not something the Americans have ever used often or liberally. They present would-be sanctions busters with a choice: do business with the sanctioned country (in this case, Iran) or do business with the United States. Since the Iranian market is roughly 1% the size of the American market, there may be a bit of whining but for most firms that’s not all that difficult a decision. And that’s before you consider the long-term demographics of the world’s major economies.

What is truly different this time around is the presence of some institutional infrastructure the Obama administration set up a few years back to force the Iranians to negotiate the nuclear deal in the first place. Via an exhausting series of bilateral negotiations, the Obama team got a good hard grip on something called SWIFT, a system for managing financial transfers between various players in the international space. They used this newfound power to apply secondary sanctions to anything that touched the U.S. dollar. Since the U.S. dollar is the only global currency of exchange (the euro position has been shrinking for years, and even the Chinese yuan has been backpedaling of late) the end result was to cut any sanctions-busters out of pretty much all international trade, even if those sanctions-busters have no direct exposure to the American market.

I think the Trump administration fully understands just how powerful of a tool it just picked up, and that tool is perfect for the job of pretty much everything else on the administration’s international agenda.

Up next: Europe Guts Itself.