Looking on the Bright Side plus other delusions
New year thoughts on the death of the West, cures for euro pessimism, the new scramble for Africa, and the next four big tech breakthroughs
Happy New Year to all subscribers, including the many who signed up over the holidays. I hope that everyone had a good a break. Mine ended up being slightly longer than intended due to a debilitating dose of flu, but despite this unpleasant start to 2025, I am determined to try to accentuate the positive so the theme of this first newsletter of the year is what might go right in the next 12 months. As always, this weekly edition is free to subscribers so please do share with anyone who you think might be interested. And if can afford to take out a paid subscription to support my work, please do consider doing so.
In this newsletter:
Death of the West: Reports are exaggerated
Euro-Pessimism: some possible cures
Scramble for Africa: Where’s the West?
Exponential Progress: The next four tech breakthroughs
1. Death of The West
I’ve tried to spend the start of the year thinking about what might go right in 2025. So much of journalism is focused on what might go wrong, looking for hidden risks or reporting on not-so-hidden disasters. But a New Year, before anyone has had the opportunity to mess everything up, is a good opportunity to reflect that the worst very often does not come to pass, that good does sometimes triumph over evil, that human progress is possible even in the bleakest of times.
Last year was a good example of that. It started with grim forebodings that in a year in which more than two billion people were expected to head to the polls, democracy was under threat amid a relentless lurch towards authoritarianism. Yet with remarkably few exceptions - notably Venezuela and, possibly Georgia - those fears were not borne out. In Bangladesh, a corrupt dictatorship tried to steal an election but was swiftly overthrown. In South Africa and India, voters saw to it that strong men leaders had their wings clipped. In European Parliament elections, the far right made gains but the centre held. Meanwhile America is preparing for a peaceful transfer of power on January 20 that had at times during a rambunctious election campaign seemed by no means guaranteed. Democracy has proved more resilient than many thought likely.
Nonetheless, that has not stopped similar forebodings resurfacing at the start of this year in the form of widespread gloom about the fate of the collective West. This gloom is understandable. It’s hard to be optimistic when the man who is about to be (re)installed as leader of the free world spent much of the holidays threatening to annex Canada, Panama and Greenland. Meanwhile Elon Musk, to whom Trump is so beholden that he astonishingly appears to have outsourced the vetting of prospective candidates for senior administration jobs, has been engaging in a clear campaign to destabilise two of America’s core allies: Germany and Britain. In the latter case, this has extended to pumping out a sinister stream of disinformation that appears aimed at provoking political violence.
If this is how the incoming US administration is going to treat America’s allies, then America’s actual adversaries, about whom Trump and Musk never seem to have a bad word to say, must be rubbing their hands in anticipation at what may unfold over the next four years. Throw in the prospect of extreme dysfunction in the new administration, with Trump-land now apparently split three-ways between original MAGA-diehards, Musk and his tech bros, and Congressional conservatives who defied Trump over the pre-Christmas order to raise the debt ceiling, and the West has never looked weaker, more divided or rudderless. No wonder, according to a new report by the European Council for Foreign Relations, that Moscow is convinced that the US is a declining power and that Trump’s election victory is a harbinger of further decline
Nonetheless, there are two reasons to question this narrative of western decline. The first is that it is hard to square with the remarkable performance of the US stock market, which delivered 20 percent plus returns in 2024 for the second successive year. Perhaps, as frequently discussed on Wealth of Nations, that the US market is in the midst of a giant bubble. But it is hard to reconcile levels of financial exuberance not seen since the peak of post-Cold war “end of history” mania with the kind of extreme geopolitical gloom that is so pervasive today. Trump may be a US isolationist but the US economy and markets are surely too exposed to global trade, too integrated into global supply chains, too reliant on global flows of funds to be able to withstand the demise of the US-led system. Either the markets are hopelessly wrong, or the gloom is overdone.
A second problem is that it is hard to reconcile the gloomy geopolitical narratives with what is happening to the West’s adversaries. The stunning collapse of the Assad regime in Syria at the end of last year exposed the extent to which its two principal defenders, Russia and Iran, had been weakened by war. Much of Iran’s “axis of resistance” across the Middle East has been comprehensively dismantled by Israel over the past year. Over the holidays, Israel turned its attention to the Houthis, the Iranian-backed Yemeni militia that has been terrorising shipping in the Red Sea at significant cost to the global economy. Iran’s capacity to cause global mischief is being systematically diminished.
Similarly, for all Putin’s bravado, Russia is making slow progress in its war against Ukraine. Despite throwing vast quantities of men and materiel at the front, it managed to seize just four “strategic” towns in 2024, the largest with a population of 31,000. Short of military manpower, it was forced to call upon North Korean troops to try to regain the Kursk territory seized by Ukraine last year. Yet as I write, Ukrainian forces appear to be undertaking a counter-offensive in the Kursk region. Meanwhile pressures on Russia’s economy intensify, leading to political tensions that are increasingly spilling into the open.
Just before Christmas, the Central Bank of Russia unexpectedly decided to freeze interest rates at 21 per cent. Governor Elvira Nabiullina said such an anticipated hike to 23 percent was no longer needed because inflation was under control, but it is hard to avoid the suspicion that her hands were tied by Vladimir Putin who days earlier publicly indicated that a rise in interest rates would be unwelcome. If monetary policy is now being driven by political expediency, Russia’s inflation problems will only intensify, leading to pressure on the Ruble, which was hit by further volatility over Christmas, and adding to cost of living pressures.
Even China does not go into 2025 with the same confidence of previous years. In his New Year address, President Xi Jingping took the rare step of acknowledging the country’s economic challenges. There is no longer much doubt that China is undergoing a dose of profound of Japanifaction, as decades of excess investment in real estate and manufacturing has given way to deflation. Already Beijing has thrown a barrage of stimulus measures at the problem, including interest rate cuts, bailouts and increased pubic spending but has so far been unable to stem falling prices. As Kenneth Rogoff and Yuanchen Yang note in the latest edition of the International Monetary Fund’s F&D magazine:
It is now painfully clear that China is not as different as most scholars still thought just five years ago. Like many other countries in the past, it too is facing the difficult challenge of countering the profound growth and financial effects of a sustained real estate slowdown.
All of this ought to be a moment of cautious optimism for the West. It is perhaps too much to hope for Syria-style regime change in Russia and Iran in 2025, even though we know from the Prigozhin rebellion in Russian in 2023 and the Woman, Life, Freedom protests that followed the 2022 murder of Masha Amini in Iran that support for both regimes is brittle. But with decisive leadership, there is no reason why the West cannot emerge from this period of extreme geopolitical turmoil in a much stronger position than seemed possible even a few months ago. Trump would appear to have an opportunity given to few incoming presidents to shape the emerging new world order decisively in America and the West’s favour.
Whether Trump will seize that chance is another matter. Little Trump has said or done suggests he will stand up to Putin, nor that he has the strategic patience to take advantage of this opportunity to lead the West to a position of greater strength from which to protect and project its interests. Nonetheless we can only hope. And from now until at least January 20th, that is what I intend to do.
2. Europe
If there is an obvious disconnect between market exuberance and geopolitical gloom in America, no such disconnect exists in Europe. Pessimism about the outlook for the continent has reached extreme levels, particularly among global investors. While US households have never been more optimistic about stocks and US fund managers have never held less cash, global fund managers are underweight European equities and no one expects them to outperform other markets in 2025, according to the latest Bank of America survey of investors.
As I noted in this piece for the Financial Times published last week, much of this pessimism is justified, for reasons frequently discussed on Wealth of Nations:
Growth has stalled, unemployment is expected to rise. The economy has been held back by burdensome regulation, high energy prices, weak demographics, growing competition in manufacturing sectors and a failure to keep pace with Chinese and American technological advances. Much of the continent is grappling with excessive debt even as governments are under pressure to deliver big increases in defence spending.
Nonetheless, one of the consequences of such pervasive gloom is that the bar is set very low for upside surprises. So what could change the outlook for Europe in 2025? In my FT column, I set out a number of possible catalysts for a rerating of Europe’s prospects:
More determined action by the European Central Bank to support growth amid growing evidence that inflation has been defeated
An end to the war in Ukraine on terms that hold out the prospect of a durable peace, allowing Ukraine to rebuild and leading to lower energy prices
A new German government that reforms or even removes the debt brake, paving the way for increased investment, backed by strong structural reforms.
Bold reforms at the European level to implement the Draghi programme to reduce red tape and improve the functioning of the single market
Progress towards new common EU borrowing to fund common objectives such as pan-European defence and clean energy infrastructure
I am not saying that any or all of these are likely, which is why none are currently included in anyone’s baseline forecasts. But all are possible and may come to be seen over the course of the year as increasingly essential. One thing I will be watching closely is whether the EU makes any progress towards completing its capital markets union and banking union, vital reforms that would reduce the cost and increase the availability of funding for the eurozone economy. After more than a decade of foot-dragging, there appears to be a broad consensus that this is an idea whose time. It is certainly a key test of the EU’s seriousness. If it cannot make progress on this, then it may not be able to achieve much else.
3. Scramble for Africa
One part of the world that is in dire need of some upside surprises is Africa, though it is not immediately obvious where they might come from. While the world’s attention has been focused on the two big geopolitical conflicts in Ukraine and the Middle East, a series of wars have been playing out across Africa that have received very little global focus. They include the ongoing civil war in Sudan, battles between Rwanda and the Republic of Congo, and the spread of militant conflicts from the Sahel towards coastal states. This superb but deeply depressing interactive chart from the WSJ does give a sense of the horrifying spread of violence across Africa in recent years:
All these conflicts have been breaking out, perhaps not entirely coincidentally, at a time when Africa is gaining a new geopolitical importance. On the one hand, the continent is a key supplier of critical minerals and resources to which every advanced economy needs to secure access at a time when the global rules-based trading system is breaking down. On the other hand, instability in Africa, exacerbated by the impact of climate change, demographics, terrorism and violent conflict is contributing to domestic political volatility across Europe.
In this new arena of geopolitical competition, it has long been clear that the West has fallen far behind. As John Bolton noted as long ago as 2018 when setting out the first Trump administration’s Africa strategy:
Great power competitors, namely China and Russia, are rapidly expanding their financial and political influence across Africa… China uses bribes, opaque agreements, and the strategic use of debt to hold states in Africa captive to Beijing’s wishes and demands.
Yet since then, America and the West have, if anything, fallen further behind. Much of the Sahel is now a Russian protectorate, with Wagner soldiers now propping up local warlords in return for lucrative contracts. Europe, saddled by its colonial legacy, its attention and aid funding diverted to Ukraine, and hobbled in its search of reliable partners by its prohibitions on corruption and commitment to the rule of law, is increasingly reduced to irrelevance.
It is not surprising, therefore, that Joe Biden chose to travel to Africa as the destination for his last foreign trip as president, with a visit to Angola at the end of 2024. Nor that Emmanuel Macron hosted the president of Nigeria in a state visit in November and visited Djibouti in November, as the French president seeks to rebuild influence in the region, even as Cote d’Ivoire last week became the latest African nation to announce the withdrawal of French forces from its territory.
I am sure that we will see far greater western focus on Africa in 2025, in contrast to the myopia towards the continent’s suffering in 2024. Indeed, I am sure that regardless of what short-term tactical successes the West may have in the coming year at the expense of the axis of authoritarian governments, its long-term strength will depend to a large degree on the influence it is able to rebuild with the Global South, particularly in Africa.
Indeed, one of my New Year’s resolutions is to pay far closer attention to Africa over the coming year. I look forward to sharing regular reports with Wealth of Nations subscribers and would welcome thoughts and insights from readers.
4. Exponential Progress
One area in which I am absolutely certain we can expect upside surprises this year lies in the field of technology. My two favourite charts that I posted on Wealth of Nations last year both concerned the astonishing speed with which technological progress is evolving, and indeed accelerating. The first chart shows the extraordinary declines in the prices of new technologies which is driving huge advances in their adoption. The second chart bears this out, showing the extent to which renewable installation has exceeded every forecast for 20 years.
As I noted in a previous post, these charts are a reminder that the history of technological advances is that they are always exponential, not linear:
It took about 30 years for the car to entirely displace the horse economy. Thirty years after mobile phones first appeared, there are already nine billion handsets in the world, more than a century sooner than analysts originally anticipated. Meanwhile in the two years since ChatGPT was launched, more than one billon people have accessed generative AI, many without even realising it. That makes it the fastest take-up of a new technology in history.
With a view to ending this first newsletter of 2025 on an upbeat note, I went back to Haim Israel, head of thematic research at Bank of America who did more than anyone last year to convince me of the utterly transformational impact of the coming developments in technology, to ask what he thought were the four most exciting innovations coming our way in the foreseeable future.
Here were his answers:
AI solutions: The biggest gains from AI in the coming years will not necessarily come from the increased use of chatbots but the way in which AI is used by businesses to improve data evaluation, run simulations and find connections. The results will be transformational for every industry, from healthcare, to drug development, to logistics and financial services. Indeed, some of the biggest gains from AI are likely to go to those businesses that are first to incorporate it into their processes.
Quantum Computing: this has been the Holy Grail of computing for decades, but thanks to leapfrogs in research is suddenly within reach. The physics are almost incomprehensible to the layman but essentially amounts to releasing computing from the tyranny of binary ones and zeroes to make possible the kind of calculations that would take today’s most advanced supercomputers tens of thousands of years to perform in just seconds. Haim Israel describes it as a “fire moment”, an inflection point that will reset the entire technological race for whoever gets there first. Google announced a significant breakthrough just last month, but the US, China, Europe and South East Asia are all investing massive sums in what amounts to a technological arms race.
Satellite communications: As the amount of data explodes, networks becomes clogged and transmission speeds and latency deteriorate, could satellite networks be the solution? Huge advances in miniaturised nano satellites plus a 90 percent reduction in launch costs in just 10 years suggest that new providers such as Elon Musk’s Starlink network could offer full global broadband coverage without the need for expensive terrestrial infrastructure. The economics look increasingly promising, with huge consequences for the global economy, particularly emerging markets.
Robotics: It’s true that robots have been around for a long time, but the latest advances in humanisation are a game changer. Currently, robots are dumb: you programme them to carry out a specific task. But with AI, they can be made more intelligent, undertaking much more complex tasks. The result is sure to be transformational for industrial productivity: factories will be able to operate 24/7 with very little human involvement.
No doubt all of these technological advances will bring huge societal challenges as well as opportunities. But what seems certain is that as much as anything that happens in the geopolitical, economic or markets sphere, these developments will shape the world in 2025 and beyond in ways that we can may be only beginning to understand. Another of my New Year’s Resolutions is to spend more time focusing on this too. I look forward to keeping you updated!
I think leaving the 'best' (depending on one's interpretation of advances in technology) to the last is a good strategy.
What’s important on Europe is that the conversation on growth is now properly mainstream and a host of solutions are clearly articulated by Draghi and others. Regulation, in particular, is stifling. I hope for some performance above the very low expectations here…as you say.