Europe's Defeat

How Europe lost the Battle of Ceuta; the four horsemen of the summer apocalypse; why Europe faces a climate sovereign doom loop; and why the Clacton by-election is not a joke

Here is this week’s newsletter. A warm welcome to quite a few new subscribers this week. Thanks as always to the generous paid subscribers whose support makes this worthwhile. If you have been enjoying these posts this year, please do consider becoming a paid subscriber too. At the very least, do forward it to anyone you think might be interested and hit the like button (which helps with the algorithm). And if you’re reading this via the Substack app, become an email subscriber to make sure you get future editions. As always, I look forward to your comments. And please do email me if you have questions or ideas for future posts.

In today’s newsletter:

• Battle of Ceuta: Europe’s Defeat

• Happy August! Four Horsemen

• Climate Crisis: Doom Loop

• Clacton By-election: Not a Joke

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1. Battle of Ceuta

Events of the past few days in Europe have been some of the most disturbing in many years - and not for the reasons given by much of the mainstream media. A consistent theme of Wealth of Nations since its launch has been the real threats to European integration - and thus to the continent’s long-term sovereignty, security and prosperity - from a pan-European far right fired by ethno-nationalism and a US government pathologically hostile to the EU that is waging a “civilisational” campaign against European governments whose goal is the vassalisation of European states (see Unhappy Vassals). All of these dangers have been in stark display in recent days.

The influx of 60,000 migrants into the Spanish enclave of Ceuta on Thursday may have been the single largest one day illegal entry into EU territory in its history, far surpassing anything seen at the height of the 2015 Syrian refugee crisis. But it was followed the next day by the single largest mass return in EU history as almost all of the arrivals returned to Morocco. They returned because they found themselves stranded in a shutdown city with no access to food or shelter, and having realised that Ceuta is not part of the EU’s Schengen free travel zone, so there was no prospect of onward travel to mainland Europe.

In the normal course of events you would think that the appropriate response of European governments, political leaders and the media would be condolences for the families of up to 67 people who tragically drowned trying to make it to Ceuta in desperate search for a better life; sympathy for the people of Ceuta, a city of 83,000 that suddenly found itself the subject of a terrifying invasion; solidarity with Spain whose border guards were overwhelmed by what was clearly at some level an orchestrated assault; and congratulations for the Spanish government which succeeded in restoring order so quickly and effectively.

Instead, of course, what we saw was a rush by European leaders to condemn Spain for failing to maintain control of an EU border amid threats to suspend it from the Schengen EU free travel area. Indeed, 22 EU leaders signed a letter that blamed Spain for the crisis and demanded an emergency meeting of EU interior ministers to discuss an “immediate and coordinated response” to improve protection of the EU’s common borders. Unsurprisingly, this drew an angry response from prime minister Pedro Sanchez, who accused them of being “driven by prejudice, fake news, ignorance, or political interest”.

The case against Spain is that the Spanish Supreme Court last month ruled that migrants arriving on Spanish territory by sea could not immediately be deported. Critics say this operated as a pull factor, encouraging migrants to swim to Ceuta in the expectation that they could not be turned back. At the same time, Spain angered many EU countries earlier this year by announcing a program to regularise the immigration status of 500,000 migrants currently in the country illegally. More than a million people have since applied for this program.

It is certainly true that both of these were weaponised in what appears to have been a very effectively orchestrated social media campaign that triggered Thursday’s stampede for the border. More importantly, perhaps, that campaign appears to have included the message that the border would that day be open. You might think that a priority of the EU institutions and leaders would be to urgently investigate who instigated that social media campaign, whether it was spread organically or whether malign actors, including state actors as well as people smugglers, played a part in spreading disinformation.

You might also think that EU leaders might want to probe the role of Morocco in this crisis. The Sanchez government has been clear that it blames people smugglers for the stampede and has absolved Rabat. But given that it is relying on Morocco’s cooperation to return migrants, they might be expected to say that. Nonetheless, the New York Times, whose reporting has been much the best of the international media, quotes multiple migrants claiming that Moroccan officials told them that the border was open and waved them through. A Senegalese migrant told the NYT that officials were only ushering through Moroccans but refusing to allow black people to pass. Social media footage shows Moroccan gendarmes standing by as dozens of migrants spill out of trucks.

Even if the Moroccans are innocent of any involvement, you might think that the EU might also want to investigate whether other state actors were involved in inciting what may have been a hybrid assault on the EU. After all, using migration as a hybrid weapon is hardly new: Russia deployed it against the EU’s eastern border in Poland and Finland, while Turkey and Libya have also used it as leverage with the EU. In this case, there have been conspiracy theories on social media linking America and Israel to the plot.

What is certainly true is that Rabat, as a signatory to the Abraham Accords, is now a close strategic and security partner of both Washington and Jerusalem - and some influential right-wing voices have also advocated using the enclaves as a way to pressure Spain, which under Sanchez has emerged as the most vocal European critic of US and Israeli policy in the Middle East. What is also certainly true is that US and Israeli officials moved with striking speed to exploit the crisis, amplifying MAGA talking points about open borders, mass migration and civilisational erasure. That these provocations were broadcast from official US government accounts — including that of vice president JD Vance and the State Department — ought to be ringing alarm bells around Europe, independent of any question about who, if anyone, orchestrated events on the ground.

Of course, there are some obvious reasons why EU leaders are playing politics with this crisis rather than focusing on the very serious issues it raises. One is that they are playing to domestic political galleries, reflecting the inevitable power that pictures of an EU external border being overwhelmed can play on public opinion. But the broader reason relates to Sanchez himself. I have noted before how the Spanish prime minister is the most polarising figure among people whose opinion I respect that I have ever written about (see Europe’s Anti-Trump). That divisiveness extends well beyond Spain. As the one of the few centre-left leaders in the EU at the head of a fragile minority left-wing government heading into elections next year who has clashed with other leaders, there is clearly a lot of intra-EU politics at play here too.

Yet one only need look at who is coordinating these political attacks to see how short-sighted they are. The Italian government, for example, was one of the first to attack Spain over Ceuta, yet Italy is by a long chalk the biggest entry point for illegal migrants into the EU. Rome was swiftly followed by the Danish government even though prime minister Mette Frederiksen has herself been one of the biggest beneficiaries of EU solidarity in response to Donald Trump’s threats to Greenland which the US president - perhaps not coincidentally - resumed on social media this weekend. Meanwhile the amnesty for illegal migrants already in Spain which has irked so many other EU governments (and which, by the way, will only provide those who regularise their status with a one year work permit, with no guarantee of a longer term visa, let alone residency or citizenship) follows similar recent exercises in other EU countries, including Italy.

That is not offered as a defence of Sanchez or Spain. It is simply to note that at a time when Europe is under sustained hybrid attack in multiple dimensions from multiple actors, European leaders have chosen to respond to an episode that raises profound questions about the security and stability of the continent not with solidarity and restraint, but with partisan politics that only underlines their fragmentation and weakness and gives succour to the pan-European far right. A profoundly disturbing day for Europe indeed.

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2. Happy August!

It wasn’t just on the EU frontier that extraordinary events were playing out last week. As GaveKal noted, if you took the last week in July off expecting a quiet time in the markets, more fool you. A number of deeply troubling events played out relating to themes much discussed in Wealth of Nations in recent months that should have everyone surreptitiously checking their newsfeeds from the beach. Here are the four horsemen of the summer apocalypse:

• Last week saw the first major hedge fund blow-up in the wake of the sharp July sell-off in AI stocks which continued last week with another steep fall in South Korean semiconductor stocks that saw the Kospi index fall 17 percent in three days (see Ominous Rotation). Situational Awareness, a fund run by Leopold Aschenbrenner, a 25 year-old former OpenAI researcher with no investment experience that peaked at $45 billion at the start of July, up a staggering 439 percent in a year, was forced to sell its public equity portfolio to Citadel after falling 67 percent in a month. That sale, combined with some better than expected results from Amazon and Microsoft, helped stabilise the market, with the KOSPI rallying 18 percent on Friday. But the market gyrations are a reminder that Chinese competition is now a genuine threat to US AI firms, raising real questions about the sustainability of planned capital expenditures. It also begs the question, what on earth were Wall Street banks doing lending such vast sums to someone with no trading experience?

• The US and Japanese governments undertook their first joint intervention to shore up the Yen in nearly 30 years after the currency had earlier in the week hit its lowest level against the dollar since 1986. Anyone who thinks this was some act of charity by Treasury Secretary Scott Bessent to help out a troubled ally hasn’t been paying attention (see Good as Gold). Japan needs a stronger Yen to reduce inflationary pressure, and pressure on the Bank of Japan to raise interest rates, which would raise government borrowing costs, adding to what is already a precarious fiscal position. But Bessent doesn’t want the BOJ to raise interest rates either, since that could unwind the carry trade and induce Japanese institutions to dump their holdings of Treasuries and other US assets, pushing up US interest costs. Nor does the US want the BOJ to weaken the Yen by dumping US assets. So Bessent intervened, tellingly not by selling dollars to buy Yen but selling Euros. He is a worried man.

• What ought to also be preying on Bessent’s mind is the fear that the new Fed chair may already be losing the confidence of the markets (see Warsh’s Fairy Tale). Last week saw a sharp sell-off in stocks and the sharpest steepening of the yield curve in a year as long bond yields closed around their highest level for 19 years. That followed a bizarre press conference in which Kevin Warsh unnerved investors by declining to elaborate on what the Fed might do if inflation picks up. That revived fears that Trump’s Fed pick may not be the inflation hawk he claims to be and will be too slow to raise rates. Bill Dudley, former president of the Federal Reserve Bank of New York, summed up the views of many investors in a piece for Bloomberg: “When Warsh… refuses to provide information about what is important to him and the Fed in conducting monetary policy, that’s where I get off the bus.” The situation is not yet lost - and indeed, Warsh’s own committee members may come to his rescue with their own explanations - but the jury is now very much out on Warsh and therefore the stability of the US financial system.

• To make matters worse, the oil price spent much of last week around $90 a barrel, only slightly down from the previous week’s peak of $102, suggesting that the market’s were far from reassured by Trump’s apparent TACO last weekend (see Not Another TACO). Whether they will be any more convinced by this weekend’s apparent TACO remains to be seen. For the umpteenth time since the start of the war, Trump followed up a week of sabre rattling, including a cabinet awayday at Camp David, with a social media post stating that, despite being “locked and loaded”, he was pausing a plan to inflict levels of terror on Iran unseen since the Second World War having been assured by Iran and allies that a deal was imminent. This was immediately denied by Iran. At this point, it is hard to believe that the smart money is any longer paying attention to Trump’s social media feed as opposed to Iranian sources, which have the benefit of being more reliable - and free.

Happy August everyone. It may be a bumpy time.

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3. Doom Loop

Sorry to interrupt the holiday season with yet more bad news. But as no one in Europe needs reminding, the climate emergency that has gripped much of the continent this summer shows no signs of abating. Wildfires came close last week to reaching Madrid and Bordeaux. Fires have also broken out across Greece and parts of Britain, including Scotland. Hungary has been forced to shut down a reactor at its only nuclear power station - and may power down the whole station within days - because water levels are too low in the Danube to cool it; the lowest water levels in the Rhine for eight years have led to a collapse in river traffic. Parts of southern England had barely 1% of their average July rainfall. The Telegraph suggests we embrace our new Mediterranean climate. Serious people should worry about what new financial risks hotter summers might bring.

I wrote last week about the economic costs of Europe’s extreme weather (see Thermometer of Growth). But the dangers to the European economy go beyond those of damage to infrastructure, lost working time and reduced productivity, disrupted supply chains and higher inflation. As I discussed in my latest column for Euractiv, there is a real risk of a wider systemic crisis.

During the eurozone debt crisis, much attention was focused on what became known as the sovereign-bank ‘doom loop’: the way fiscally constrained states were unable to stabilise weak banking systems, which in turn undermined confidence in government bonds, which further undermined confidence in the banks that held those bonds.

Now we are seeing what Bruegel has called a climate-sovereign doom loop. This time, the mounting financial costs of the climate crisis are eroding the fiscal strength of sovereigns, lowering growth and shrinking tax revenues; deteriorating credit ratings and investor nerves then push up the cost of borrowing, constraining their ability to invest in climate adaptation, and so leaving them even more exposed to the costs of the next disaster.

Meanwhile what risks turning a run of expensive summers into a genuine loop is the shortage of private-sector insurance. That means many of these costs fall directly onto the government balance sheet, with the state acting as insurer of last resort. Only about a quarter of climate-related catastrophe losses are insured in the EU and coverage varies enormously, ranging from around 1% in Romania to 61% in Denmark.

Coverage also varies sharply by hazard. Storms and hail run at around 36% cover, floods at 15%, but droughts, heatwaves and wildfires trail at just 10 to 11%. Fire is the least-insured major risk in Europe – which means it is the hazard that lands most heavily on the government or households. Raising levels of climate risk insurance should therefore be a priority. Otherwise governments are left choosing between an implicit state guarantee, which creates moral hazard, and the risk of stranded assets and abandoned communities.

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4. Not a Joke

There’s been far too much politics in Britain lately, as Brenda from Bristol would no doubt agree, what with the agonisingly slow death of the Keir Starmer government and the swiftly executed Andy Burnham coup. So perhaps the new prime minister has judged the mood of the country rightly by subjecting the public to a daily diet of whimsical TikTok videos - and the media have judged the mood rightly by casting the Clacton by-election on August 13 as a joke.

But that is worse than a mistake. It’s a missed opportunity. It was the right call by all the mainstream parties to refuse to participate in an unnecessary election that Nigel Farage initiated to divert attention from a parliamentary investigation into undisclosed gift amid wider revelations about his party’s funding, thereby leaving the Reform leader looking silly. But that is no reason for the mainstream political and media class to try to frame the election as a two-way contest between Farage and a comedy candidate who calls himself Count Binface.

There are in fact 34 candidates on the ballot, including several novelty candidates and plenty of independents. But John Stevens, a former Conservative Party MEP and dogged pro-European campaigner who is standing for the Rejoin EU party, is deadly serious. Not because he expects to win but because, he tells me, that he has discovered on the doorstep that there are many in the Clacton constituency, which was once solidly Tory territory, who are strongly anti-Brexit and anti-Farage - and they resent the suggestion from supposed allies in the media that they dishonour their democratic rights by voting for a man dressed as a bin. Stevens’ goal is to give these people a chance to be heard.

There was huge excitement just a few weeks ago when Andy Burnham won a striking victory in what local elections earlier in the year had suggested was a solidly pro-Reform constituency. It is fair to say that the outcome helped change the course of British politics. No one is expecting anything so seismic to emerge from the Clacton by-election. But a strong showing for the Rejoin EU candidate in one of the most solidly pro-Brexit constituencies in Britain would certainly send a message that Westminster would be forced to hear. If the British media really want to land a blow on Farage and strike one for the country, they should drop their infantile obsession with Count Binface and take the election seriously.