The British government announced March 27 that Prime Minister Boris Johnson tested positive for coronavirus, making him the first world leader to do so. As the United Kingdom is an advanced democracy, here at ZoG we are not overly concerned with Johnson’s isolation and perhaps incapacitation or even death. Part and parcel of democracies is that succession is part of life. The UK will get through this one way or another.
However, there are many countries that are not democracies and there are many world leaders far older than Johnson…
In the age of coronavirus, Europe’s near-term future is bleak.
European headlines in coming weeks will be about coronavirus deaths. In large part the issue is demographic. Coronavirus is far more likely to kill those over aged 60. The average European is approximately a half-decade older than the average American. Only the Japanese are older.
Specifically, Italy hosts the world’s second-oldest population, while Germany ranks 5th. Meanwhile, many of the “new” European countries in Central Europe are not all that much younger, while also lacking German- or Italian-quality health care. Others, Ireland, Greece and Spain come to mind, have had to deal with financial crisis by cutting services. Services like health care. The United Kingdom, courtesy of the dual forces of Brexit and coronavirus, are seeing many health care professionals who are not UK citizens but who were able to work in the UK during the Kingdom’s EU membership, fleeing back to their home countries at the worst possible time.
The demographic issue will hurt Europeans on more than simply mortality figures.
People under 45 tend to be a society’s big spenders. They buy cars and homes. They go to university. Such consumption is what drives most modern economies. But not in Europe. Europe’s young cadre is thin and getting thinner by the year. Most European countries – Italy and Germany most notably – have already aged to the point that any sort of demographic rebound is now impossible. They simply don’t have enough people who could even theoretically have children. There certainly aren’t enough people of the right age demographic to drive a consumption-driven rebound.
Which makes mitigating the economic damage of coronavirus structurally impossible. The sort of consumer stimulus which is the backbone of consumer-focused, anti-recession efforts in the United States simply wouldn’t work in Europe. On the whole, the European Union has aged into being little more than an export union. And in a time of global travel restrictions and virus-forced collapses in income and consumption, there just isn’t anyone to export to. All Europe can do is shelter in place, pray their health systems hold, and wait for the world to restart. So long as the coronavirus is impinging activity anywhere, a sustained European economic recovery is impossible.
But even if Europe had a favorable population structure, it lacks the institutional structure to hold the line against the virus anyway. It comes down to money.
Having its own currency enables the United States to print however much money it wants to risk, using that money to fund its own deficit spending. Neither W Bush nor Obama nor Trump would ever be confused with fiscal conservatives, but even now at the very beginning of the process we are seeing spending bloat unprecedented in American history – even at the height of World War II. By the second week of April, the Americans will have pumped over $2 trillion in financial relief into their system, or roughly 10% of GDP, in addition to monetary stimulus of a volume that stuns the imagination. The current spending wave has already seen the Federal Reserve hoover up over $1 trillion in securities, while the federal government is putting up to $1200 into the hands of the vast supermajority of American adults, with a $500 kicker for each child. Nor will this be the last such infusion. Expect another one sometime in the summer.
Europe lacks that sort of power and flexibility.
Part of the network of treaties that underpin the common European currency mandates not only fairly strict deficit ceilings (although those ceilings were suspended over the weekend) but far more importantly the Maastricht Treaty on Monetary Union took monetary responsibility out of member governments’ hands. European states can’t print currency. If they want to deficit spend, they have to raise the funds themselves. That takes time. That takes investors willing to put their money into governments’ hands.
Now technically, the European Central Bank can expand the money supply, and it will, but there are two problems. First, Europe never truly recovered from the 2008 financial crisis. Eurozone interest rates have been negative for years. What about unconventional measures? Much ballyhoo has been made in the United States about how the Federal Reserves purchased scads of bonds to prop up markets, purchases which peaked at just shy of 25% of GDP at the height of the financial crisis. The ECB’s balance sheet as of January 1, 2020, after a decade of calm and before coronavirus erupted, was twice that in relative size. It isn’t clear the ECB has much ammo to use here, conventional or unconventional.
Second, any ECB action raises the issue of whose bonds will the ECB buy? Will it be the country with the most likely chance of repayment (Germany), or the country facing the worst health crisis today (Italy), or the country likely to see the highest death rate (Spain), or the country in the worst financial position (Greece)?
Every time the Europeans face any sort of question that bridges the monetary and the budgetary, the eurozone finance and prime ministers have to meet to hash out their disagreements in marathon negotiating sessions that take days (if not months). In times of calm this is a questionable system which often borders on the comical. In times of crisis it is really really really really stupid.
It shows in the outcomes. During the 2008 financial crisis the Americans did more mitigation in three weeks than the Europeans did in nine years. This time around, the Americans did more in 48 hours than they did during the entire financial crisis.
The funding America’s Small Business Administration made available to provide bridge financing for America’s small businesses is a case in point. On day one $50 billion was unleashed, with another $350 billion to be available by April 1. The EU has no such established facility. Individual European governments are scrambling to raise the necessary cash for their own small businesses. Weaker EU states are unlikely to be able to raise the requisite funds without raiding their already rickety banks. With quarantines in place, entire countries shut down. Add in Europe’s far less flexible labor market and a workforce which remains wedded to old-style set-location facilities means European firms have more need for bridge financing than American ones, yet even Europe’s capacity to provide that financing is far lower.
Europe today is just getting going with its Rube-Goldberg-like-decisionmaking machine, and this time around coronavirus quarantines prevent the European leadership from even meeting in person to hash out a plan. The only European leader with gravitas, German Chancellor Angela Merkel, is in isolation due to potential coronavirus exposure.
Which means “Europe” cannot be part of the mitigation process.
That leads us six places, none of which are good. First, European investors know all this and they aren’t flooding their money into European assets. Instead, it’s a massive flight to US dollar assets. Expect the USD to continue to rise throughout the crisis.
Second, an exception to that rule will only increase the light between the various European governments. Germany, unlike most of Europe, has steadily whittled away at its debt levels to the point that pre-crisis there was a shortage of high-quality, low-risk government debt on European financial markets. With Germany loosening the purse strings, investors will purchase German debt. It is the bulk of the rest of Europe that’s likely to be shunned. Deep, visceral splits between how the Germans and the bulk of the Union viewed finance existed before coronavirus.
Debates on the topic are already taking on the stench of desperation. On March 25 the leaders of France, Italy, Spain, Portugal, Ireland, Luxembourg, Slovenia, Belgium and Greece (aka countries who consistently find balancing their checkbooks difficult) called upon the EU to issue a joint debt instrument to deal with coronavirus. Germans are likely to have a different opinion.
Third, when the scale of the capital flight and budgeting shortfalls becomes apparent, when European governments realize the money they need to try to save their systems is leaving, they will take action. Expect strict European capital controls at all levels. (China of course already has capital controls. Expect them to intensify.)
Fourth, the controls won’t be nearly enough. Even if the Europeans could prevent capital from leaving, raising capital to fund emergency spending the old-fashioned way isn’t as quick or effective as the American method of simply flipping the switch on the printing press. Firms would fold in the thousands, and the damage will not be limited to the small players. To stave off the subsequent economic and cultural carnage, expect mass nationalizations throughout European economies. Unsurprisingly, the French are already discussing the mechanics of how to manage this. Peugeot, Renault and Airbus have already indicated they will fight the process (although they’d still love help with recapitalization and operating costs).
Fifth, this is likely the end of “European” manufacturing. The European manufacturing system, especially the German manufacturing system, is based on the free movement of goods, people and capital across borders. That simply isn’t possible in an environment of national quarantine, capital flight, capital controls and nationalizations. Post-crisis things will still be made in Germany and Bulgaria and Sweden and so on, but not all that much is likely to be the result of a multi-national European supply chain.
This is doubly problematic in the short term as most European countries lack even small pieces of the medical supply chain. While the US can retool and China can get back to work, many European states simply don’t have anything within their borders they can use.
The dream of Europe was that open borders would enable Europe to have economies of scale of the Chinese or American type. But these are still separate countries, and the utter inability of the EU to ride to the rescue leaves individual states more or less on their own at the worst possible time. Germany, for one, is a major exporter of medical equipment, and it has already barred exports of many coronavirus-related materials. Even to its EU partners. Many Europeans already resent Germans’ unwillingness to share their wealth. Imagine how refusal to share medical equipment will go over once the death toll gets seriously scary.
Sixth, this is the end of the European economic and social model, and it risks being the end of “Europe” as an entity.
Europe’s demographics make consumption-led growth impossible, even as coronavirus blocks export-led growth.
The Americans were backing away from the global security rubric that makes Europe’s export-led growth model possible before coronavirus, and the virus is only accelerating America’s turning-inward.
Europe lacks the institutional capacity to manage crisis response.
Europe lacks the financial capacity to cope with the crisis, much less apply the sort of financial fire-hose the Americans did almost reflexively.
Dealing with the virus’ spread has already forced the Europeans to abandon the free movement of people.
Dealing with their financial shortfalls will force them to abandon the free movement of capital.
Dealing with mass nationalizations and the loss of export markets will force them to abandon the free movement of goods.
That’s three of the four freedoms upon which modern Europe relies. The fourth freedom – movement of services – was largely something that only the UK cared about, and the Brits are gone.
There is one possible “solution” to these problems: drop the euro.
If the Maastricht Treaty were abrogated (or at least suspended) and national control over monetary policy reintroduced, individual European countries could then engage in unlimited quantitative easing, both to mitigate the current crisis and to help manage the subsequent damage and recovery. This would (obviously) hold (many) downsides, but if the goal is to have the necessary capital required to address the current crisis, this is the only path I see that still results in salvaging Europe’s current economic and social structure.
In theory, once coronavirus was in the rear-view mirror, Europe could go through the process of re-merging their currencies (perhaps this time without basket cases like Greece). Yes, I realize this would be monumentally messy, but we’re already in a world where economic and financial norms are in abeyance. Most of contemporary Europe’s “messes” require extensive multi-national negotiations. This “plan” has the advantage of countries doing things themselves.
Regardless of the path forward (or down) coronavirus is just the beginning of Europe’s problems. Demographics, economics, financials, supply chains, none of it works under coronavirus – and coronavirus is going to be with us until we either get a vaccine, herd immunity or mass serological testing, none of which is particularly likely to happen in 2020. Even then, it is far from clear that Europe as we know it can reconstitute in the world after coronavirus. And never forget that all Europe is not created equal. Germany is not France is not Italy is not Poland is not Sweden is not Portugal is not Romania.
An end to the concept of “European” being singular represents more than simply the return to the norm of European history, it removes one of the central pillars of the world we know. That cascading failure and the reordering to come will be a subject in subsequent installments in our Coronavirus Guides series.
And now the pitch: the Coronavirus Guides are our primer documents, intended not to finish the discussions of this or that topic, but to launch them. Contact us at Zeihan.com/consulting to inquire about rates and scheduling options for teleconferences, videoconferences and in-depth consulting calls.
Not all epidemics are created equal, even when everyone is battling the same pathogen. Let’s start with timing and intensity. The imminent coronavirus wave of cases about to hit the United States is going to hurt, but it will hurt less than what’s about to occur in Europe.
Despite all their similarities, there are sufficient differences between America and Europe demographically, geographically, economically and institutionally to generate significantly different epidemic experiences.
Let’s start with connectivity. Despite being all under a single political authority, the US has considerably less connectivity than either China or Europe.
First, because of its failure of national infrastructure. The US has no meaningful passenger rail system aside from creaking Amtrak in the Northeast corridor, and it has no highspeed rail at all. If Americans want to travel long distance, their choices are limited.
Passenger aircraft: While it hasn’t officially been shut down (yet) American carriers have already reduced their flight schedule by over two-thirds, and most of America’s smaller airports are already closed. Expect several of the larger ones to follow suit.
Automobiles: Car travel is slower and outside of summer vacation season (which is likely suspended for 2020) is largely limited to short-haul travel. It is also incapable of serving as robust of a disease vector as passenger aircraft.
Second, it’s a simple issue of size. China is physically larger than the United States, but some 95% of its population lives on less than one-third the land area. Europe’s usable land is one-third less the size of America’s while its population is one-third larger. That makes America’s functional population density roughly half that of Europe and one-fifth that of China. Social distancing is simply easier when there is already some distance baked in to living conditions. Those hell commutes many Americans factor into their lives at least have one silver lining.
Third, the “normal” function of the American economy is a bit more resistant to viral spread than the European or Chinese equivalent. America’s economy is primarily service based, and roughly one-third of its workers can work remotely. Yes, that’s a low number, but it is significantly better than the figure in more industrial China or more manufacturing-based Europe.
Even within manufacturing, arguably the economic sector most impacted by the virus because staff must come to the facility to work, the Americans have a bit of insulation.
In part it is because the outsourcing of manufacturing jobs to China means the US manufacturing base is smaller in the first place and so less likely to serve as a disease vector. American manufacturing largely limits itself to North American needs. It isn’t nearly as export-driven as Europe or China and as such simply has fewer personnel to expose.
In part it is because the America’s manufacturing is integrated with Mexico, a country with which the US has a hard border that limits personnel exchange. For their part, China’s system is largely self-contained within its borders, while the German manufacturing system enjoys passport-free access to all its manufacturing partners throughout Europe.
None of which means the Americans are incapable of having an epidemic, obviously, but it does mean that epidemiologically segregating America’s cities from one another is a far simpler task than doing so in China or Europe.
The road forward will look something like this:
Europe is next up. Best guess is Europe had more – perhaps several times more – coronavirus cases than the United States. What is occurring now in Italy with high numbers of deaths and higher numbers of cases, will repeat in northern Europe on a much grander scale. Americans will get a good hard look at what the virus can do to a place of similar socioeconomic development before the virus crashes into the United States. From the point of large-scale movement restrictions, the peak in cases and deaths is typically two weeks out with notable declines in three weeks. Europe didn’t begin their restrictions until the week of March 16, so expect the epidemic to likely peak in the first or second week of April. In the meantime, Spain is following closely in Italy’s footsteps. Madrid is at the heart of the outbreak with a rapid increase in hospitalizations and a rising mortality count now well above what the US experienced on September 11, 2001.
One to two weeks later comes the United States. For the reasons noted above, the virus’ penetration into the United States will likely be somewhat less intense in terms of number of cases with several metro regions unlikely to experience severe outbreaks, but that doesn’t mean the Americans are in for a softer ride. There will be plenty of population centers that will feel the pain: Seattle, San Francisco, New York and New Orleans are particularly high on our watch list.
American deaths will fall into two general buckets.
First, the elderly. This group will feel disturbingly similar to cases elsewhere. Best data out of Italy suggests the average age of mortality from coronavirus is 80. On the somewhat bright side, however, is the simple fact that the Americans have fewer elderly. Birth rates in most of Europe cratered over 30 years ago, meaning that the average American is about a decade younger than the average European.
The second category for mortality are those with impaired respiratory health. Mild (and easily survivable) cases involve “only” the upper respiratory system and often involve “only” a dry cough and fever. Severe and critical cases (which require hospitalization) see the virus migrate into the lower respiratory system, inducing pneumonia and lung failure. Americans may be younger than Europeans on average, but they are also in poorer health. America teems with “lifestyle” diseases such as obesity and diabetes. Over half the American population has restricted respiratory health, making much of the population more vulnerable to the virus’ effects.
Once the initial peak passes, we’ll start peeking out from under our rocks and start venturing back into the sun. We’ll loosen our quarantines on both sides of the Atlantic, but the virus won’t be done with us. Europe’s higher connectivity means the virus is likely more entrenched more deeply within the population than the United States. Europe’s quarantine will need to last longer, and Europeans’ close proximity to one another means a local flare-up can easily go national or transnational. Distance and the de facto suspension of air travel means the United States can – will – have local flare ups and they will jump cities. But the combination of the virus’ relatively long incubation period combined with the fact that most US cities are at considerable remove will make the post-quarantine period feel like a giant game of whack-a-mole instead of a nationwide secondary (and tertiary, and quaternary…) epidemic.
There’s one additional difference worth noting. Leadership at the national level in the United States and the supernational level in Europe is sorely lacking.
Ideologically, the Trump administration is fairly opposed to government, and as such has refused to fill – three years into its term – many top spots throughout the federal system. Mr. Trump is also pretty hard on what staff he has; Even within his cabinet Trump has a bit of a revolving-door policy for top personnel. For example, the president is already on his fourth chief of staff. Don’t-shoot-the-messenger is a concept largely lost on the American president and he is allergenically opposed to information that doesn’t match his worldview or whim.
That makes epidemic mitigation – something that to be done right requires seeking bad news – damnably difficult. Trump’s decision to stop air traffic first to China and later to Europe was probably the right decision, that bought the United States a month of time to prepare. But then the Trump administration returned to business as usual and, a month later, here we are. Functional action on the epidemic, therefore, falls to the states and cities who are now competing for resources to combat the virus.
Europe isn’t any better, but it is less because of ideology or personality and instead because of constitutional law. The European Union has no indigenous disaster response capabilities, and what little it has are held within the NATO alliance. Since NATO’s backbone is US troops and since not all EU members are NATO members, it is highly unlikely we’ll see NATO forces enforcing quarantines across Europe.
Making decisions about novel situations at the EU level typically requires multiple all-night summits of all EU heads of government to hash out ad hoc legal and financial compromises. Under quarantine, that’s simply impossible. With the exception of Italy, the Europeans didn’t even begin travel restrictions until a week ago. Legally and functionally, the EU’s member states are entirely on their own, and most lack even scant bits of the supply chains required to ramp up medical services.
These differences in health, age, governing and health care systems abound and are giving us a real-life compare-and-contrast case study between two similar-yet-different systems that is simultaneously large-scale, amazing and disturbing. These differences will also generate radically different consequences in finance, manufacturing, currency and governance – all of which will be the subject of subsequent installments in our Coronavirus Guides series.
And now the pitch: the Coronavirus Guides are our primer documents, intended not to finish the discussions of this or that topic, but to launch them. Contact us at Zeihan.com/consulting to inquire about rates and scheduling options for teleconferences, videoconferences and in-depth consulting calls.
After three years of drama, on midnight Jan 31 the Brits finally left the European Union. The next piece of the Brexit drama will be a decidedly non-European affair, instead being between a family debate between London and Washington.
Bonds are sliding toward negative territory across the developed world. Among the largest industrialized economies, only the United States is offering over 2% yields on 30-year bonds. And it’s not just the global economic pillars pushing rates down, but even in places like Poland that stretch the definition of “developed” market. Or Italy, which push the boundaries of concepts like “balanced budgets.” And even in Greece, which stretches the definition of… pretty much damn near everything.
What gives?
First, the technical answer.
Part of the shift toward negative territory is quantitative easing (QE). QE is, in essence, the expansion of monetary supply above and beyond what the economy says it needs, and then using the newly “printed” currency to purchase various bonds. This artificially drives down borrowing costs of all kinds and inflates financial markets. The idea behind it is that cheaper borrowing costs and an inflated finance market will boost business and consumer confidence and from that, spending — thereby boosting demand in the real economy.
Between the American, European and Japanese programs, the equivalent of some $15 trillion has been dumped onto markets through QE since the 2007 financial crisis. One reason for the dollar’s strength under Trump is that the United States’ QE program largely came to an end several years ago and the US has reverted to using more traditional monetary tools. In contrast, Europe has been at near-zero interest rates for a decade (and Japan for twice as long), leaving QE or things like it as their only means of using monetary policy to stimulate economic activity. The Eurozone, after a brief hiatus, just restarted QE again a few weeks ago. Japan never really stopped.
It all adds up to a lot of money chasing limited investment opportunities. That boosts stock and property markets, while the surge into bonds pushes yields negative.
Second, we have the traditional answer.
There is a whiff of instability surrounding everything. Germany is undoubtedly in recession and will drag much of the Eurozone down with it. Japan hasn’t seen reliable, sustained economic growth since the 1980s. The American-Chinese trade war has collapsed global confidence in the Chinese economy while the HK protests have collapsed Beijing’s soft power. Meanwhile, it seems that nearly every country in the Middle East is facing some degree of crisis. Even if you’re an aficionado of my brand of Kool-Aid and believe that the US is largely resistant to global upheaval, “resistant” is not synonymous with “immune.” While I still do not see an American recession on the horizon, the American economy has most certainly slowed.
Recessions — even fears of recessions — have consequences for capital. Spooked investors tend to push money into assets backed by either long-term income streams, government guarantees, or both. Fewer stocks, more bonds. High bond demand pushes yields down towards, to, and through zero.
It isn’t so much that either answer is wrong. In fact, they are dead on. But they are not the whole picture. There’s something else going on. Something much bigger than QE and much more structural than the normal ebb and flow of economic cycles.
It’s demography.
People act differently depending on their age. There’s aren’t a lot of retirees at spin class, nor do college students frequent buffets that specialize in creamed vegetable products. In a “normal” economy there’s a set balance of roughly four children to three young adults to two mature adults to one revered elder. So long as that proportion holds the economic system has some somewhat straightforward characteristics: young workers spend and borrow, mature workers invest, while retirees shift their financial holdings into decidedly less interesting and volatile holdings. Fewer stocks — more t-bills and cash.
The problem, if “problem” is the correct word, is that the onset of the Second Industrial Revolution roughly 140 years ago both pushed people off of the farm and into urban environments while vastly, dramatically increasing lifespans. As the decades rolled by our definition of “normal” has shifted. Families became smaller and smaller until most of the developed world slipped below the replacement level of 2.1 children per family. Among the developing world the process started latter, but the downward shift in fertility has been two and three times as fast. The partial exception? The United States. Its wealth of arable land has made it an industrialized country that urbanized slowly. The result? China’s population is already older on average than America’s, while Indonesia and Brazil’s will surpass America’s average ages in about a quarter-century.
The problem (and this time “problem” is certainly the correct word) is that the demographic shift has altered the structure of capital. From roughly 1970 to 2010 the decline in birth rates steadily increased the proportion of mature workers in the population relative to everyone else. It is this block that saves the most both in relative terms and in aggregate. Those savings are the bulk of the world’s working capital. Left unchecked, the growth of the mature worker cohort will eventually oversupply the world with capital.
Well, “eventually” is here. Right now, the population of mature workers as a proportion of global population is at its peak. As this cohort inexorably edges toward retirement, they are shifting their portfolios into less risky assets. Less venture capital, more bonds. The veritable tsunami of capital into the bond space has pushed the safest of those bonds — government debt — firmly into the negative.
Don’t get used to it.
The biggest thing that separates mature works from retirees is time, and in 2022 the majority of the world’s Baby Boomer cadre will have aged into mass retirement. Denied much in the realm of fresh income, the incoming tsunami of government-bond-capital won’t so much recede as evaporate.
Without those inflows, capital costs will — must — rise.
That’s the best-case scenario. It assumes no disruptions. No breaks in global continuity. A rapid climbdown from the trade war. That Italy doesn’t implode. That the Eurozone holds together. That the Brexit debacle calms down. That the Japanese economy can manage its aging and shrinking worker pool via automation and robotics. That the Chinese political center holds. That the broad swathe of the developing world can somehow double their standards of living in under a decade without sacrificing family size. That there’s no shock to energy markets. That the economic contortions of mass aging somehow magically avoid touching banking and finance. That the Americans elect a mild-mannered accountant to be their next president.
Anything that injures either globalization in general or employment and wealth levels specifically immediately imposes burdens, both in terms of raising financing costs directly and preventing capital created in one region from pouring into another. Fragmenting global capital markets will, all by itself, turn regions that have recently become used to ultracheap capital (sub-Saharan Africa, Brazil, and India come to mind) once again into capital deserts.
That’s still a pretty good scenario.
It assumes the global system while beaten and bloodied ultimately holds. Historically speaking, the downturns an instability we’ve experienced to date — and this includes the Great Recession — are pretty minor stuff. The global Order is what has enabled many countries to exist in the first place, and if you cannot exist you cannot issue bonds. A heartily inconvenient fact of economic history is that before the Order (that is, 1946), it was pretty common for markets to not simply fail but go to zero.
The first time that happens the financial markets will come face-to-face with a level of risk and risk pricing that no one alive has any expertise in managing.
The United Kingdom stands at the precipice of its greatest change since the collapse of empire. It will be just as painful.
This week Britain got a new parliamentary grouping – the Independent Group – that might in time form the kernel of a new political party. It started with a breakaway of seven opposition Labor MPs, and on Feb 20 picked up an eighth defector as well as three MPs who ditched the ruling Conservatives.
The environment shaping the splintering, unsurprisingly, is Brexit.
Let’s start with the Conservatives. Prime Minister Theresa May arguably has the worst job on the planet right now. May believes the 2016 referendum in favor of the United Kingdom leaving the European Union obliges her to lead the United Kingdom to leave the European Union. We can debate whether referendums truly are the will of the people (I’d argue that since referendums ask explicit questions they are purer gauges of the popular will than elections), but the point is that May’s interpretation of the results are that hell-or-high-water the UK will leave.
It was always going to be messy. There was never going to be a divorce deal with the European Union. EU policy dictates that in any big issue each individual EU member must approve of the final text. The Irish want to maintain restriction-free access to Northern Ireland. The Spanish want a path to recovering Gibraltar. The Dutch want the British as close to the common market as possible, but not if it means they have to follow rules the British do not. The French want to gut the British geopolitically. The Germans seek to maintain market access but deny London any rule-making influence.
There simply is no iteration of any deal that can satisfy all these divergent interests, much less in the short two-year timeframe the Brexit negotiations allowed. Getting a comprehensive trade deal with Canada took the EU a decade. Even if there were a path forward that would please all of Europe, any such deal couldn’t get through the British Parliament. In losing those three MPs, May has lost her majority – which was already razor thin and only in existence at all with the help of a minor Northern Irish party which has some pretty uncompromising views on issues Irish.
No, there is zero way forward here that is anything other than a hard crash out. I’ve held this position from the beginning, but now the United Kingdom cannot get anything done that requires a parliamentary majority.
Those of you on the political left, don’t get cocky. British Labor’s mess is just as bad with the added problem of not being in power. Between 2016 and 2018 the Labor Party came back from the bleeding edge of dissolution under the leadership of Jeremy Corbyn by tacking to the hard left and bringing in a lot of youthful energy.
The problem is that young Brits tend to be exceedingly pro-Europe while Corbyn is anti-…. pretty much everything, with Europe near the top of his list. When you’re not in power it is easier to paper over such differences, but with many in the Labor Party agitating for a second referendum to undo the first one and with Brexit the issue of the moment, it is getting harder to hold the party together. The seven Labor MPs who founded the Independent Group did so expressly because they want the UK to remain in the EU and felt their leader was on the wrong side of the issue.
I see a few things here:
First, the United Kingdom’s party structure is in freefall. Neither the Conservatives nor Labor are unified on the issue of the day and so MPs are breaking off in an attempt to form new poles of power. Something similar is occurring in the United States, but features of the British system enable the shift to occur much more quickly.
The United States distributes power among local, regional and national levels, while the presidency is elected independent of Congress. In such a system the level of direct/local democracy is higher, but on the big issues change tends to come more slowly because a party breakdown doesn’t immediately or necessarily change the national government. (This design quirk is part of why any American administration always seems so tone deaf while Congress seems so feckless.) The biggest shock to the American system, the end of the Cold War, is only now – three decades later – working its way through the political framework. And it has taken that combined with things like digitization, the ongoing Baby Boomer mass retirement, and the rise of China to force a long-overdue political reshuffling.
In contrast in British national elections the various elected representatives meet in Parliament and select the national leader from among their own number. If the ruling party cracks, it can no longer command a majority in Parliament. A vote of no confidence can bring the government down in a day, force new elections in a month, and voila! New parties, new government, new policies.
Second, in the United Kingdom the next few weeks to months will be utter political paralysis. May has lost her majority so even if the European Union could stomach a Brexit deal more favorable to the UK, May can no longer get any deal approved. Only five weeks remain until Brexit occurs. With the reality of a hard Brexit belatedly sinking in, Parliament should be incredibly busy with a mass of enabling legislation that would help smooth the process within the United Kingdom in preparation for what happens after nearly a half-century of laws and regulation are invalidated in a day. No such luck. This is going to make the transition much more difficult than it needed to be and it was already going to be very difficult.
Third, if anyone wants to take advantage of the United Kingdom, now is the time. Upon leaving the EU the Brits will lose access to half of their trade portfolio and there is zero vision within the country’s political and cultural structures as to how to move forward.
Politically, the Brits cannot chart a route forward. May undoubtedly is not in it for the long haul, and Brexit challengers within the Conservative Party are, how shall I put this, not exactly carved out of honesty, thoughtfulness or creativity.
On the other side, Labor is led by a man who makes Donald Trump look honest, thoughtful and inclusive. The defectors who formed the Independent Group had some choice words for their former leader that included things like bigot and Stalinist. Considering how fast a single election in the United Kingdom can change policy paired with the epic possibilities for rapid change that Brexit provides, the election of Jeremy Corbyn would be a disaster that would take the United Kingdom a generation to recover from.
For Brits reading this, please take to heart that this criticism of Corbyn’s character and policy preferences comes from a citizen of the United States, a country with a well-documented and respected track record in recent decades of selecting the absolute worst candidate from among a wide range of suitable options. I know a damp squib who is chuffed at his own chunder when I see one.
The country most likely to seek advantage over the Brits is a country that has done it before: the United States. In World War II the Americans nailed the Brits to a borderline-usurious deal known as Lend-Lease in which the Brits received some shoddy, outdated ships in exchange for almost every bit of the British Empire in the Western Hemisphere. That deal subjugated the United Kingdom to American strategic preferences for the next two generations.
Post-Brexit Britain will be its most geopolitically desperate since those dark days when it stood alone against the Nazis, and the American administration is already in the process of rewiring all its foreign relations. Any deal negotiated in the post-Brexit chaos will be at least as disadvantageous as Lend-Lease and will – at a minimum – result in most of the British financial sector decamping to New York City.
Finally, a few words about what the Brits are leaving. The drama of Brexit has enabled the Europeans to shift attention from all those issues that were already past the point of no return in 2016: immigration, refugees, the Ukraine War, Russian aggression, the Syrian War, overloaded pensions, demographic collapse, sovereign debt, Greek insolvency, Italian banking, the failure of the German political center, the deliberate destruction of liberal democracy in Poland and Hungary, the end of productive relations with Turkey, etc.
Not only have none of these issues gone away, all have gotten worse. Many are fully capable of killing the European project independently. All of them combined simply make the end of the EU an issue of a betting pool for the date. With the Brexit “process” about completed, all European eyes will refocus back upon these unsolvable issues. For Europe, the year 2019 will suck as much as it will for the Brits. The EU was always going to end, so the Brits getting out before the collapse and getting a head start on whatever is next will a decade from now broadly be remembered as the right call.
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.
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:
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,
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?
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.
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.
