European Spring?
Thoughts on Europe's encouraging response to transatlantic rupture, why Still Here Keir is a morbid symptom of British decline, and how the AI revolution is devouring its children
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European Spring? Ignore Marco Rubio
Still Here Keir: Britain’s morbid symptoms
The Solow Paradox: AI devours its children
1. European Spring?
From a geopolitical perspective, the most important international gathering of the past week may have taken place not in Germany, at the annual Munich Security Conference, but in a castle in Belgium where European Union leaders met for a “strategic retreat” to the discuss the bloc’s economic future.
In Munich, the star turn was taken by Marco Rubio, who tried to pour oil on the troubled waters of the transatlantic relationship with a speech of supreme unctuousness. The US Secretary of State extolled America’s historic links with Europe, it’s desire to work with allies, for Europe to be strong. “We may live in the Western hemisphere,” he cooed, “but we will always be the child of Europe.”
Rubio’s speech was no doubt partly intended as a riposte to Mark Carney’s now famous warning at Davos last month of a “rupture” in the global order. It was also at attempt to repair some of the damage caused last year when Vice President JD Vance turned up in Munich and ranted about Europe’s “threat from within”. He did well enough to be given a standing ovation by those in the room; Wolfgang Ischinger, the chairman of the conference, even called the speech “reassuring”.
Nonetheless, Rubio’s speech has rightly been greeted with scepticism. Far from repudiating Vance’s incendiary speech, he largely endorsed it, albeit in more emollient language. Besides, in a world that is governed by the erratic output of Trump’s social media feed, it is not clear to what extent Rubio even speaks for the president. Nor could Rubio’s speech erase memories of the Trump administration’s deeply hostile actions towards Europe over the past year. Those have included:
Coercing Europeans into agreeing deeply one-sided trade deals with America
Continuing to try to push Ukraine into a de facto surrender to Russia. Indeed, Rubio didn’t mention Ukraine once in his speech and went straight from Munich to Hungary and Slovakia, the countries with the two most Russia-friendly leaderships in the EU
Threatening to invade the territory of a European Union member state and Nato ally. As Danish prime minister Mette Frederiksen confirmed in Munich, Trump administration is still “very serious” about acquiring Greenland
Threatening to impose tariffs to penalise European countries that supported Danish sovereignty over Greenland
Confirmation that the State department is preparing to fund Maga-aligned think-tanks and charities across Europe as part of its campaign to boost support for anti-EU far right parties
That’s why last week’s gathering of EU leaders to discuss ways to strengthen the bloc’s resilience ahead of formal summit in March may prove the more significant event last week. Already, European governments are taking various steps to “de-risk” their economies from the US, as this analysis from Politico notes.
France is moving to ban public officials from using American platforms including Google Meet, Zoom and Teams, a government spokesperson told POLITICO… In the European Parliament, lawmakers are urging its president, Roberta Metsola, to ditch U.S. software and hardware, as well as a U.S.-based travel booking tool… In Germany, politicians want a potential German or European substitute for software made by U.S. data analysis firm Palantir.
Other steps under discussion in Brussels include diversifying sources of gas supplies away from the US by deepening talks with alternative suppliers including Canada, Qatar and North African countries such as Algeria. There is talk about how to reduce reliance on U.S. payment systems such as Mastercard and Visa. In Germany, some politicians are sounding the alarm about 1,236 tons of gold reserves that Germany keeps in the Federal Reserve Bank of New York.
Meanwhile last week’s retreat honed in on a series of measures to improve the EU economy’s competitiveness and resilience. The first was a joint German-Italian-Belgian-led push to speed up efforts at deregulation. The second was a French-led push for greater EU investment in strategic sectors, albeit one that fell short of President Macron’s demand for a protectionist “Made in Europe” strategy. The third was a commitment by the Commission to push ahead with initiatives to deepen the single market, if necessary with coalitions of the willing rather than all 27 members, even if that risks creating a multi-speed Europe.
We will have to wait and see how much, if any, of this translates into real action. We have had many false dawns in Europe before over the last couple of decades. But it does feel as if something has qualitatively shifted in the debate in the wake of the Trump shock, and particularly the Greenland crisis. Even my former WSJ colleague Joseph Sternberg, usually a fierce critic of European inertia, detects encouraging signs of change in their air:
One is the development, although tentative, of a plausible reform agenda at the EU level. Another is the hint of a political coalition that might one day be able to sell it to voters.
As Wealth of Nations has noted, Trump’s rupture of the global rules-based order is likely to have far-reaching implications for business and investors (see Regime Change). Perhaps a revival of the European economy will be one of them.
2. Still Here Keir
If the UK press is to be believed, Britain was on the brink of deposing yet another prime minister last week - its fifth in four years - and Sir Keir Starmer was about to become the highest profile scalp so far claimed by the Epstein scandal, which is truly bizarre when you consider that he wasn’t even mentioned in the Epstein files, let alone met the child sex offender. Of course, whether the press is to be believed is an open question - one I discussed on last week’s BBC Media Show.
Personally, I never believed for one minute that Labour MPs would be reckless enough to inflict on the country a lengthy leadership contest, with no idea who or what lay at the end of it, at a time of intense geopolitical and financial volatility and just three months before local elections in which the party looks certain to take a drubbing. So I wasn’t surprised that the breathless media circus over the previous week ended in an embarrassing anti-climax.
As I said to the BBC, this whole episode does raise some awkward questions about the nature of British political journalism, not least its treatment of anonymous sources, which in my experience is quite different to the much more rigorous approach taken by US newspapers. It is remarkable to note that throughout the course of last week’s political crisis, just seven out of 404 Labour MPs publicly called for Starmer to go - and several of them were far left MPs from whom he had previously withdrawn the whip. Former BBC correspondent Mark Urban has a good Substack post on the need for some media self-reflection.
That said, there is no doubt that Starmer is making a terrible hash of being prime minister and that all those negative briefings reflect deep frustration at his indecisiveness, bad judgment and lack of basic political skills. The fact that he last week sacked the cabinet secretary that he appointed just 14 months ago, having already parted company with two chiefs of staff and four directors of communications, not to mention his disastrous appointment of Peter Mandelson as ambassador to the court of Donald Trump is evidence of deep dysfunction.
Yet as I noted in my latest column for Kathimerini, whatever Starmer’s personal failings, it would be wrong to lay the blame for the latest turmoil solely on him. In reality, he is as much a symptom as a cause of Britain’s current state of unhappiness. His lack of a coherent vision is not accidental. It was the necessary condition for any government to get elected in 2024 in a country that refused to acknowledge the consequences of its decisions to leave the EU and accept Britain’s diminished status in a new multipolar world order.
The previous Tory governments, under a succession of failed leaders, tried to hide those consequences by deferring difficult decisions on tax and spending arising from the devastating impact of Brexit upon growth - estimated at somewhere between four and eight percent of GDP - while allowing public services and infrastructure to deteriorate.
Worse, Boris Johnson tried to cover up the economic consequences of a collapse in the number of European workers in Britain as a result of the end of EU freedom of movement rights by allowing an unprecedented surge in migration from the rest of the world. More than four million people arrived in Britain in the four years of the so-called Boriswave, of whom 2.25 million remain, amounting to one in 25 of those resident in Britain today. That has only fuelled support for anti-immigrant far right parties, deepening political fragmentation.
Britain’s problem is that, even now, there is no appetite in the political system - or among voters - to acknowledge these challenges. It is not just Starmer who lacks a plan. So do his would-be rivals in the Labour party or opponents in other parties. There is no willingness to confront the hard fiscal choices necessary to meet the demands for increased spending on defence and an aging population. Nor is there any willingness to discuss the strategic choices that a fragmenting global order is thrusting upon Britain. Starmer talks about getting closer to the EU despite making little progress on his reset, while the right denounces even modest steps towards closer alignment as a Brexit betrayal.
Can Starmer use this reprieve to learn from his mistakes and rebuild his political authority? Most commentators think that he will be forced out in May, following local elections at which Labour is on course for spectacular defeat. On the other hand, the choice facing potential assassins will be the same as last week. Unless they are willing to confront the hard choices that the political system has been ducking for a decade, his departure would likely set off another round of political instability with consequences that may be hard to contain, not least in the markets. Who wants to be responsible for that?
3. AI’s Solow Paradox
One of the more troubling conversations I had last week concerned the way in which AI is gobbling up entry level service sector jobs. I was with a group of senior finance industry executives who were discussing how this was creating a challenge for firms since it meant they no longer had a pipeline of staff to climb the first rungs of the management ladder. But according to the chief executive of one fund manager, AI has a solution to that too: AI can supervise the AI.
The question of where the AI revolution may lead has been dominating markets over the last few weeks - and the biggest casualty has been software stocks. As Sarah Kessler noted for the New York Times Dealbook:
The reason for the panic is clear: Over the past 12 months, software stocks have seen their biggest plunge in more than 30 years, wiping out $2 trillion of market capitalization from the peak, according to J.P. Morgan. The S&P North American Expanded Technology Software Index has dropped about 20 percent in just the past month. And shares of the software giants Salesforce and ServiceNow are down more than 40 percent over the past year.
A lot of that damage has come just in the past several weeks, as the release of powerful new A.I. tools, like Anthropic’s Claude Opus 4.6, have put into sharp relief how quickly the technology is advancing.
Much the way that software has long disrupted whole industries, A.I.’s arrival is redefining what it means to be an innovative tech company.
Could the market be getting ahead of itself, discounting worst case scenarios? Torsten Slok, chief economist at Apollo, reckons that four years after the arrival of ChatGPT, the evidence for widespread disruption is not yet clear.
The Nobel Prize–winning economist Robert Solow said in 1987, “You can see the computer age everywhere but in the productivity statistics.” This observation is the so‑called Solow productivity paradox.
The same can be said today: AI is everywhere except in the incoming macroeconomic data.
Today, you don’t see AI in the employment data, productivity data or inflation data. Similarly, for the S&P 493, there are no signs of AI in profit margins or earnings expectations.
Nonetheless, the data might be finally be changing. Erik Brynjolfsson, the director of Stanford University’s Digital Economy Lab, writes in the FT that the latest data published last week does point to a pick-up in productivity:
While initial reports suggested a year of steady labour expansion in the US, the new figures reveal that total payroll growth was revised downward by approximately 403,000 jobs. Crucially, this downward revision occurred while real GDP remained robust, including a 3.7 per cent growth rate in the fourth quarter. This decoupling — maintaining high output with significantly lower labour input — is the hallmark of productivity growth.
Meanwhile Louis Gave at GaveKal makes the point that the AI stock market disruption is spreading beyond software to other parts of what he calls the “knowledge economy”. This, he warns, is obviously bad news for the US equity market, since so much of the valuation of the US equity market is based on intangibles and the belief that “knowledge” is the most important of assets:
If, thanks to AI, knowledge is suddenly ubiquitous and “free,” then investors could well fall back on things they can “touch,” whether copper mines, oil rigs, refineries, or turbine manufacturers etc. A new market trend which suddenly seems pretty obvious? If so, this is not great news for the relative performance of US stocks against the rest of the world.
This is somewhat ironic. Rather than solidifying US dominance over global financial markets—the consensus opinion until five minutes ago—it increasingly looks as if the spread of AI is instead destroying US outperformance. Or to put it in other words, AI seems to be yet another example of a revolution that ends up eating its own children.
I suspect that we are only at the early stages of a revolution whose consequences we have barely begun to understand.
I can only say 'bang on' Simon! You've been the first I've read to have finally written a 'J'accuse'! You've brought out all the skeletons in Starmer's and BJ's cupboard and hung out their dirty washing! Thank you! Please stand for election and sort Britain out!
The British rightwing press are nihilists who have no strategic sense or vision for this country. They are just lackeys for their owners who despise them. They have never accepted the legitimacy of the huge Labour majority. They will only be happy once they have plunged this country into chaos under Farage.