Daddy Issues

Thoughts on Labour's unhappy anniversary, Nato's unresolved Daddy issues, can Brussels rescue the global trading system, why Europe's anti-green backlash is bad for business and Britain alone

Photo by Patrick Fore on Unsplash

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In this newsletter:

• Labour’s First year: Unhappy anniversary

• Future of NATO: Daddy issues

• Global Trade: Brussels to the rescue?

• Greenwashing: Bad for business

• Britain Alone: Never surrender

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1. Unhappy Anniversary

Next Saturday marks the first anniversary of Labour’s election victory and it is hard to find anyone who thinks the past year has gone well. In the past month alone, Sir Keir Starmer has been forced into authority-sapping U-turns on winter fuel payments for pensioners, a national inquiry into grooming gangs, and reforms to disability benefits. The party is languishing at just 23 percent in the polls, second to Nigel Farage’s Reform party, and the prime minister is plumbing record levels of unpopularity for a leader this early in their term of office.

The press this weekend has been awash with political analysis on what has gone wrong and why. Patrick Maguire provides a detailed account in The Times of the feuding among Starmer’s advisers and the doubts within the Labour party of the prime minister’s political skills. Starmer himself appears to confirm those doubts in interviews with The Observer in which he expresses regret for his appalling “island of strangers” speech on migration, and with The Sunday Times in which he takes responsibility for the welfare debacle. Some pundits have even started to speculate that Starmer may be forced to stand down before the next election.

But this focus on personalities and politics risks overlooking the deep structural economic challenges after 14 years of Tory rule that are the real source of Labour’s troubles. This dire Tory legacy is best seen though the prism of the markets. Since the 2022 Liz Truss debacle, the UK government has had to pay a significant risk premium relative to other G7 economies to borrow from the bond markets. And since the 2016 Brexit referendum, UK shares have traded at a deep discount to US and even European markets. That makes it far more expensive for British firms to raise capital, leaving them easy prey for foreign predators.

That Labour has not been able to overcome this lack of global investor confidence in Britain is the biggest disappointment of Starmer’s first year. Indeed, some of the government’s decisions on tax and employment reform may have exacerbated it. As I noted in my latest column for Byline Times:

[Rachel] Reeves’s hope was that the incoming Labour government, by promising political stability in place of Tory chaos and fiscal responsibility underpinned by tough fiscal rules, could restore investor confidence in UK assets. Removing the risk premium on gilts and reducing the discount on UK shares would bring down government interest costs, lower private sector borrowing costs, and encourage international investment to flow back into the private sector. But nearly a year later, there is little sign of any significant shift in sentiment. Instead, her task has got harder. Thanks to Trump’s trade wars, which have pushed up longer-dated bond yields globally while dampening growth prospects, Britain is even more vulnerable.

One reason for this continued lack of confidence in Britain was highlighted at the recent “Bank of England Watchers” conference in London: the fear among investors that the UK is vulnerable to “fiscal fatigue”. In other words, they worry that the UK political system does not have the patience and persistence to bring down a debt burden that now stands at close to 100 percent of GDP and which even on the Office for Budget Responsibility’s March forecast, will barely have come down by the end of the five year forecast period.

Those fears will only have been fuelled by Starmer’s benefits U-turns which will cost an estimated £4 billion and have killed any hope that Labour will be able to reduce debt by cutting expenditure. What’s more, the OBR’s debt forecasts were based on growth and interest rate assumptions that already look optimistic. It is pretty much a given now that taxes will have to rise in the next budget, heaping further political pain on Labour. The question is whether they rise by enough to quell doubts about “fiscal fatigue”. In that context, it was striking that Goldman Sachs this week noted that this could in fact help the economy:

If the government is forced to consolidate further, policies that weaken demand would likely lead to interest rates falling more, offsetting the impact on growth and further reducing borrowing.

What is clear is that to win back investor confidence, Labour needs to show that it can master events, rather than be continually surprised them. That may mean taking advantage of the extraordinary geopolitical volatility to revisit some of those manifesto pledges. After all, it is not as if the party is getting any political credit for sticking by them. Higher taxes would be more palatable if accompanied by serious plans for public sector, tax and welfare reform, rather than panicky piecemeal measures introduced with minimal consultation.

As for the discount on UK shares, that reflects a pessimism about Britain’s growth prospects that Labour’s very welcome and much-needed efforts to revive infrastructure and housing investment are unlikely to address. To really remove the discount would surely require removing what led to it in the first place: the self-inflicted disaster of Brexit which has inflicted huge costs on the economy. As Andrew Bailey, the Governor of the Bank of England, has started to acknowledge publicly, the most potent growth lever is to deepen trade ties with Europe.

The prevailing assumption in the media seems to be that if Labour continues to struggle, the beneficiary will be Nigel Farage’s Reform party even though Reform’s current economic plans are entirely fantastical. But it would be odd given the polling which shows a clear majority of the public wants a closer relationship with the EU if over the next four years, if it didn’t boost the fortunes of the most pro-European party. Indeed, to the extent that predictions so far ahead of the next election have any validity, I reckon that it is far more likely that the Liberal Democrats will form part of the next government than Reform.

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2. Future of Nato

Reports of the death of the West may have been exaggerated, judging by some of the more excitable commentary in the wake of last week’s NATO summit. Unlike the G7 summit in Canada a week earlier, Donald Trump stayed for the whole gathering, helped by the fact that it was cut from two days to two hours, managed not to insult anyone and even signed a communique, albeit one that was only five paragraphs long. He even appeared to give his backing to the alliance’s Article 5 mutual defence clause, despite having cast doubt on it on the plane over.

So job done by Mark Rutte, Nato’s new secretary general, even if the former Dutch prime minister undermined his own diplomatic success with his nauseating reference to Trump as “Daddy”? Not so fast. The fact that the communique was so short was a clear indicator that there were deep divisions between the alliance members that could not be overcome. More broadly, there are reasons to fear that this summit may have left Europe badly weakened:

• By allowing themselves to be bullied into an implausible commitment to spend five percent of GDP on defence by 2035, European governments may have given Trump the excuse he needs to do what they most fear: withdraw US forces from Europe. He can now claim that Europeans are taking on the burden of their own security so the US military is no longer needed

• As noted last week, the commitment by European alliance members (other than Spain, which secured an opt-out) to spend 5 percent of their GDP on defence was a distraction from the real task at hand which was to plan for a future in which Europe needs to be able to confront Russia without the US. That increases the risk that the extra money with be spent inefficiently and ineffectively to boost national defence sectors rather integrate capabilities.

• In agreeing to an implausible target of spending five percent of GDP on defence that most countries have little prospect, or even intention, of reaching, Europeans have handed America a stick to beat them with for the next decade. Expect Trump to use it. Indeed, he is sure to use any slippage as leverage elsewhere, as he is already threatening to do against Spain. More broadly, Trump’s commitment to Article 5 is not something that Europeans can bank on. He has shown time and again that his word is not to be trusted.

• To the extent that European governments do try to hit the five percent of GDP target, the stage is now set for intense “guns versus butter” political fights in which the biggest winners could be the Russia-sympathising far right parties. Indeed, the Labour government’s U-turns over welfare reform are an early example of this tension in Britain. In Germany, the government is similarly reluctant to push ahead with much-needed welfare reforms

• The Nato communique for the first time since the Russia’s full-scale invasion of Ukraine contained no commitment to uphold the United Nations general charter or the international rules-based order. That reflects Trump’s disdain for international rules, which was highlighted days before the summit by his decision to bomb Iran without any legal pretext. The fact that European governments refused to criticise this flagrant breach of international law will only fuel accusations in the Global South of western double standards, which in turn risks undermining international support for Ukraine.

• Meanwhile the greatest danger of flattering Trump is that it may teach him that he can get away with doing pretty much whatever he likes, notes Andrew Gawthorpe of Leiden University in a piece for The Conversation. “For a president who has threatened to annex the territory of Nato allies Denmark and Canada to nevertheless be feted at a Nato summit sends a message of impunity.” That is a dangerous message for Trump to receive when he is busy undermining the rule of law on a daily basis and home and abroad.

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3. Brussels to the Rescue

That said, now that the Nato summit is out of the way, attention over the next week or so will return to trade, where the future of the West is also on the table. It was certainly welcome that last week Scott Bessent wrote to Senate Republicans to ask them to remove the notorious Section 899 “revenge tax” from the “Big Beautiful Budget Bill”. This would have allowed the Trump administration to impose punitive taxes on the US income of any foreign business whose government it believed was treating America “unfairly”. That at least removes one source of global investor anxiety hanging over the US economy and markets.

Nonetheless, the risk of a resurgence in trade tensions when the 90-day pause on “reciprocal” tariffs expire on July 9 cannot be ruled out. The markets took comfort last week when Howard Lutnick, the US Commerce Secretary, said a deal had been signed with Beijing that would allow the resumption of rare earth exports from China. He also said that a further 10 deals were imminent.

On the other hand, Trump’s announcement via a Truth Social post on Friday that he was stopping all trade talks with Canada because it had refused to scrap its digital services tax was an ominous reminder that there is still a huge gulf between what Trump is demanding and what most countries are prepared to offer. After all, Trump is also taken aim at the EU’s digital services tax and has threatened tariffs of 50 percent if a deal is not agreed by July 9.

In that context, one of the more promising developments of last week was the announcement by Commission President Ursula von der Leyen following last week’s summit of EU leaders that the bloc was considering joining forces with the 12 members of the Asian-led Comprehensive and Progressive Agreement for Trans-Pacific Partnership bloc (CPTPP) — which now includes the U.K. — to form a new world trade initiative. This was a welcome sign that the EU is starting to think in bolder geopolitical terms and forge its own alliances to take on Trump.

As Politico reported:

The new grouping would redesign a rules-based global trading order, reforming or perhaps even replacing the now largely defunct World Trade Organization, she said. Crucially, the U.S. would not automatically be invited.

Such a plan would “show to the world that free trade with a large number of countries is possible on a rules-based foundation,” von der Leyen said at the end of the EU leaders’ summit in Brussels in the early hours of Friday morning. “This is a project where I think we should really engage on, because CPTPP and the European Union is mighty.”

For middle-sized powers such as the countries of Europe and South East Asia, the international rules-based system is a global public good that not only underpins their prosperity but is vital to their sovereignty. As noted here many times before, its chief benefit is that it offers every country the reassurance that they can get access to the resources that they need at market prices. The alternative to a global trading system based on rules is one of trading blocs, empires and coercion - the sort of might makes right world that Trump appears intent on returning us to.

Sure, the rules-based system has not been functioning properly for a long-time and is in urgent need of reform. But even influential voices on the right in the US are urging the US to back reform rather than destroy the World Trade Organisation, including the American Enterprise Institute and the Cato Institute. There seems zero chance of that happening under Donald Trump who has shown that he has no interest in abiding by any rules. Nor, as this gloomy assessment for the CEPR acknowledges, is there any realistic mechanism for kicking the US out of the WTO, even if an American withdrawal might be desirable.

But the EU and CPTPP countries could go a long way towards shoring up the international rules-based trading system by working together on a new framework that they could apply among themselves but which could be open to others to join. As Ignacio Garcia-Bercera, the EU’s former senior trade negotiator, argued in this recent paper for Bruegel, the Brussels-based think-tank:

At a minimum, the cooperation framework should agree on how trade rules can be modernised in areas including digital trade, the interface between trade and climate policies, and cooperation on economic security and supply-chain resilience. These discussions could provide the basis in the short-term for negotiations on a digital trade agreement, and on joint principles to promote resilient and sustainable value chains.

Indeed, by opening the door to negotiations with other like-minded countries - which could be expanded to include major emerging economies such as Brazil, India and South Africa - the EU would shut the door to those of its members that might be tempted to respond to Trump’s threats with domestic protectionism that would only further undermine the rules-based system.

Of course, any attempt to reform the international system to create a more level playing field will inevitably force the EU to confront some of its own practices, particularly in sensitive areas such as agriculture. But that would be no bad thing, for the global economy and for Europe itself. Besides, such is the price of global leadership. The alternative, as promoted by Trump, is far worse.

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4. Greenwashing

One of the more troubling developments of the past week was the demise of the EU’s green claims directive. This perfectly sensible piece of EU legislation that had been two years in the negotiating appeared until a week ago to be imminently headed for the statute book. That was until the Commission suddenly announced just over a week ago that it was withdrawing the directive, only to U-turn a few days later, before the Italian government withdrew support in the European Council. That has effectively killed it for the foreseeable future.

What makes this debacle worth highlighting is that it is the latest evidence of how the EU’s “Green New Deal”, which was the flagship achievement of Ursula von der Leyen’s first term as Commission president, is being dismantled in her second. In Brussels, it is being held up as evidence of how the far right tail in the European institutions is increasingly wagging the supposedly mainstream dog. This has potentially wide-ranging implications for European businesses.

The purpose of the Green Claims directive was to crack down on bogus green claims by companies. According to the EU’s own research, 53 per cent of green claims give vague, misleading or unfounded information; 40 per cent of claims have no supporting evidence; and 50 per cent of all green labels offer weak or non-existent verification. This was obviously unfair on businesses that made legitimate green claims as well as misleading for European consumers.

Opponents of the directive claim to be acting in the interests of businesses. The ostensible reason given by the Commission for threatening to withdraw it was a provision that would have extended the new rules to “micro-enterprises”. Yet a deal on limiting the application to smaller companies was on the table. Meanwhile many businesses support the directive, not least because existing anti-greenwashing rules rely on competitors bringing expensive claims.

Indeed, one of the things that gets too easily lost in the debate over sustainability rules is that it is often businesses that are driving the process. This is clear from the debate also raging in Brussels over the Commission’s “Omnibus” proposal to simplify three corporate sustainability disclosure directives.

I’ve been discussing these proposals in a series of podcast interviews with business, financial and political leaders over the last few months and the one message that has come through clearly is that while everyone accepts the need to simplify the reporting requirements, there is considerable business and investor anxiety that the baby risks being thrown out with the bathwater.

In the most recent interview with Annika Ramskold, the chief sustainability officer of Wattenfall, the Swedish energy company, she makes three key points:

• the choice is not between new EU rules and no rules, but between an EU rule and 27 different national rules. An EU-wide disclosure regime is itself an important simplification of the existing legal framework

• climate and human rights-related risks for businesses are very real and potentially very costly. A disclosure regime that allows these risks to be identified throughout the supply chain thus reduces risks and costs

• while big companies may have the resources to investigate risks in their own supply chains, smaller companies may not. That makes it harder for them to win contracts, thereby making the market less competitive

On a weekend when much of Europe is melting under a severe heatwave, when the financial risks of climate change are becoming ever more apparent, one would hope that the case for greater climate and sustainability-related disclosures was obvious. Instead, the debate is increasingly being hijacked by ideologues on the Trumpian far right whose objections have nothing to do with supporting business. That Brussels appears to be falling victim is very worrying.

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5. Britain Alone

There seems to be a broad acknowledgement among even Sir Keir Starmer’s opponents that whatever his travails on the domestic front, he has been surprisingly sure-footed in the international arena. Many have been surprised by the relationship he has built with Donald Trump (at least until last week, when he - along with the entire world - was wrong-footed by Trump’s decision to bomb Iran, which prompted a particularly batty Times leader).

Personally, I have found his obsequiousness to Trump excessive and thought his brandishing of an invitation from King Charles for a state visit while in the Oval Office nauseating. I wasn’t surprised to read last week that the King clearly thought so too. Nonetheless, Starmer’s indulgence of Trump was perhaps a little more understandable after listening to this sobering podcast series based on a wargame in which Britain comes under attack from Russia. Yikes.