Murdoch's Succession Drama
Things that have caught my eye this week, including the Pompeo plan, the looming era of free energy, Germany's dismal investment record, Biden's bad African bet and the future of right-wing media
1. The Pompeo Plan
I have written before about my doubts that Donald Trump would really try to force Ukraine into an ignominious surrender of territory or would withdraw America from Nato. Someone else who appears to share those doubts is Mike Pompeo. In an op-ed for the Wall Street Journal, Trump’s former secretary of state sets out what he calls A Trump peace plan for Ukraine - and there is much to like about it.
His solution is “peace through strength”. The key elements are to impose “real” sanctions on Russia that would cripple its oil industry; to bulk up America’s defence industry; to reinvigorate Nato by getting Europeans to ramp up defence spending to 3 per cent of GDP; to create a $500 billion lend-lease program for Ukraine similar to what America offered Britain during World War 2 so that it can borrow as much as it needs to win; and to lift all restrictions on the weapons that Kyiv can obtain and use.
These steps would position Mr. Trump to set the terms of a deal: The war stops immediately. Ukraine builds up substantial defense forces so Russia never attacks again. No one recognizes Russia’s occupation and claimed annexation of any Ukrainian territories—just as we never recognized the Soviet incorporation of the Baltic states and withheld recognition from East Germany until 1974. Crimea is demilitarized. Ukraine rebuilds with reparations from Russia’s frozen central-bank reserves, not U.S. taxpayer dollars.
I have no idea whether Trump is contemplating any such plan. I fear that Alexander Vindman may be right when he posted on X in response: “I was the director for Russia on the NSC [National Security Council] during the Trump Admin., Donald has no interest in challenging Putin and Russia.” Nonetheless, this is surely a far better plan to end the war than anything that the West has tried so far.
Joe Biden has achieved many good things as president but his handling of the Ukraine war is not one of them. From the administration’s failure to arm Kyiv ahead of the invasion, to the unforgivable delay in reinforcing Ukraine over the winter of 2022 following the recapture of Kherson, to the prevarication over whether to send tanks, then fighter jets, then long-range missiles and now whether to allow Ukraine to target military installations inside Russia, Biden’s record is a litany of missed opportunities.
There is no greater priority to revive the global economy and ease global tensions than to end the Ukraine war. Whoever wins in November could do worse than adopt the Pompeo plan.
3. Free Energy
There was plenty of comment in the British press this week, much of it negative, about the launch of GB Energy, Labour government’s new state-owned power company . Ed Miliband, the energy secretary, sees this new entity, which will invest directly in new clean energy projects, as essential to the delivery of the government’s mission to decarbonise Britain’s electricity network by 2030, which ministers say is essential to boost Britain’s energy security and reduce energy prices. Most commentators seem to think the goal is unattainable and unaffordable.
Perhaps it is, though that may be a subject for a longer post. But what caught my eye this week was this piece in the Economist that cast a rather different light on the energy debate. In some parts of Europe, the abundance of renewable energy has left countries grappling with a new and unexpected problem: negative prices.
Owing to the rapid spread of solar power, Spanish energy is increasingly cheap. Between 11am and 7pm, the sunniest hours in a sunny country, prices often loiter near zero on wholesale markets (see chart). Even in Germany, which by no reasonable definition is a sunny country, but which has plenty of wind, wholesale prices were negative in 301 of the 8,760 tradable hours last year.
Ultra-low energy prices are, of course, a nice problem to have, though not if you are a renewable developer looking for a reliable return on your investment. As the piece points out, there are solutions, though none of them are easy: better interconnection across Europe so that electricity can flow to countries where prices are higher, greater use of batteries and other storage technologies, and smart grid technologies that, for example, enables the network to use household and car batteries as storage.
I don’t have any doubt that solutions will be found. The consequences for European energy prices and security are sure to be far-reaching. Already European power prices have tumbled from a peak of 740 EUR/MWh in Italy in August 2022 to an average of around 70 EUR/MWh this month but as low as -4 EUR/MWh in France, according to a new report by Bank of America. These declines are partly due to lower wholesale gas prices and lower demand for energy which is down on average by about four per cent a year since the 2022 shock as a result of efficiency measures. But it is also due to a dramatic increase in renewables in the energy mix at the expense of gas. What’s more, Bank of America expects prices to continue to fall even as demand for electricity soars to fuel demand from data centres, electric vehicles and AI.
The entirety of generation to meet this load growth is expected to come from renewables. Gas, coal, and oil capacity are expected to fall roughly 34GW between 2024 and 2030 in Europe while solar and wind rise 244 and 127GW respectively. Storage is also expected to ramp up 88GW to help utilize these intermittent resources. At a generation level, this brings up wind and solar generation in Europe from 34% of total generation in 2024 to 55% of generation in 2030.
Meanwhile some parts of the world are already well on their way to getting 100 per cent of their electricity from renewables. As RethinkX, a techno optimist think-tank, recently noted, solar, wind and battery (SWB) installation is growing exponentially around the world, with some regions already on track to hit 100 per cent by 2030:
This is happening at scales both large and small, from the entire state of California to the city of Mumbai to remote Aboriginal communities. In 2023, South Australia was powered by only solar and wind for at least part of the day on 282 days of the year, and is on track to produce all annual electricity from SWB by 2028.
But this is just the beginning. In the United States, SWB will make up 94% of new capacity additions in 2024, bringing the percentage of total electricity generation by solar and wind power to 18% and still growing exponentially... In China, the progress is even more spectacular, with solar and wind slated to comprise 40% of total power generation capacity by the end of 2024.
It seems to me that those questioning whether Labour can decarbonise the grid by 2030 are missing the wider picture. Whichever country succeeds in getting to 100 per cent renewable electricity generation first will be at a huge competitive advantage, with a marginal cost of energy of close to zero. What responsible government would not want to make sure that they were at the vanguard of this revolution?
3. German Risk Aversion
I was fascinated by this terrific piece by Joachim Klement on his excellent Substack, Klement on Investing, on just how bad the Germans are at investing. He draws on a recent paper by the Kiel Institute to show that Germany has spectacularly underperformed rivals in terms of the returns it achieves on its international investments. As he says, this necessarily aggregates several different forms of investment from foreign direct investment to portfolio investment to bank reserves. And there are several reasons for the underperformance, including a tendency to invest in other advanced economies where returns are lower, to a preference for bonds over equities. Nonetheless, there is a common theme, says Klement:
Germans seem to have a generally lower risk appetite than investors in other countries. Germans are famously pessimistic, always expecting the next crash or bear market and this has significant consequences for their investments.
I don’t disagree with his conclusions about German attitudes to risk. But I do think there is a wider point to be made here about attitudes to saving and investment across Europe. So much of every country’s financial system is path dependent, deeply embedded in its history and industrial development. Countries which were late to industrialisation, which is most of continental Europe, tended to evolve financial systems built around banks rather than stock markets. Countries that historically have always had high levels of national debt, such as Italy and Belgium, tended to evolve savings cultures based around government bonds rather than equities. Only Britain and the Netherlands evolved genuine equity cultures, and in Britain’s case, apart from the brief heyday of the domestic stock market between the 1950s and 1980s, the focus of that equity culture has been on international investment.
That points to the central challenge in European finance today, which is to broaden and deepen its pools of domestic risk capital. As previously noted, the post global financial crisis banking reforms have effectively killed risk-taking by the European banking system, at least as far as business lending is concerned. At the same time, Europe has failed to develop deep and liquid alternative sources of corporate finance. Levels of private pension saving remain far too low across the continent, which means there is a dearth of risk capital. Equity markets remain undeveloped, particularly for early stage companies. The European Union’s capital markets union project has gone nowhere for a decade, held back by a reluctance by governments to harmonise rules.
Recently there has been some signs that at a political level, the tide may be turning. In his Sorbonne speech in May, Emmanuel Macron railed at the Basel rules which hold back risk-taking by banks. In her speech to the European Parliament just over a week ago, Ursula von der Leyen lamented the absurdity of European savings being used to finance projects overseas due to a lack of opportunities to invest at home. The Commission president has pledged to act on the recommendations of Enrico Letta, the former Italian prime minister, to build a savings and investment union as the key to restoring European productivity and competitiveness. Those reforms cannot come soon enough. I suspect that at the core of Germany’s problems with international investment lies a historic lack of domestic equity risk-taking.
4. Biden’s Kenyan Bad Bet
Another recurring theme of the Wealth of Nations is the central role of Africa in many of the challenges facing Europe and the wider West. Those challenges include both the pressures of migration arising from climate change, conflict and poverty as well as access to critical resources - and with much of the continent struggling with heavy debt burdens and intolerable interest costs, those challenges are only going to increase. Yet the West has been losing influence in recent years in Africa, in part due to its emphasis on human rights. This has opened the door to countries such as China and Russia which can offer incumbent regimes greater security in terms of both their own survival and enrichment in defiance of democratic norms. A senior French defence official told me recently that he blamed the withdrawal of European investors from the Sahel for France’s loss of influence over this deeply unstable region.
So it is perhaps not surprising that America should have made such a heavy bet on William Ruto, the democratically elected president of Kenya, as an ally with which it could do business in Africa. Ruto may have been a highly flawed candidate for American patronage, given serious allegations of past human rights abuses for which he only escaped trial on a technicality. He also had a long record of alleged cronyism and corruption. Yet he had won election on the back of promises to Kenya’s younger generations of wide-ranging reform and a commitment to tackle the country’s desperate cost of living crisis. The Biden administration decided to embrace him, designating Kenya America’s first non-Nato ally in sub-Saharan Africa, and awarding Ruto the honour of a state visit, the first by any African leader since 2008.
Yet as this excellent piece in Foreign Affairs by Michelle Galvin, a former US ambassador to Botswana now at the Council for Foreign Relations, makes clear, this American bet on Ruto has badly misfired. Ruto’s attempt to resolve the country’s fiscal crisis by heaping taxes onto ordinary workers led to massive demonstrations in which dozens of protesters were killed, leading him to sack his entire cabinet. Now he has appointed a new cabinet that includes four members of the opposition but half of which were in the previous cabinet. Not surprisingly, the young protesters who felt betrayed by him the first time feel they are being taken fools all over again.
All this leaves America facing a dilemma. It has embraced Ruto too closely to walk away now. On the other hand, it can hardly give him a free hand without betraying a generation of young, ambitious, aspirational Kenyans who reluctantly voted for Ruto because they believed his assurances of economic reform. Yet all may not be lost: Ruto has asked Washington for a sovereign bond guarantee which would ease some of Kenya’s financial pressures, buying time for reforms. Galvin says America should offer him one, but make it highly conditional on delivery of the reforms that would show Kenyan civil society leaders that in backing Ruto, America is not abandoning them.
As Galvin says, such a guarantee would be expensive for America and a tough political sell domestically. But the US has offered such guarantees before to countries it deems strategically significant. Who knows? A successful intervention could offer America and the West a much-needed model to regain influence on this vital continent.
5. Murdoch’s Succession Drama
In a plot twist that could have been taken straight from Succession, Rupert Murdoch is reportedly going to court to battle three of his own children over the terms of the family trust. According to the New York Times, the 93 year-old patriarch has concluded that the conservative orientation of his news empire would be more likely to be preserved if his eldest son Lachlan, the current chairman, was to have sole control after Rupert’s death rather than the all four of his eldest children be given an equal say over the company’s future direction. Prudence, James and Elizabeth are known to have more liberal views than the editorial line taken by the likes of Fox News. the Wall Street Journal, New York Post, The Sun and The Times.
Obviously I should declare an interest, having worked for two Murdoch-owned newspapers, the WSJ and The Times, for a total of 15 years. But I think this tantalising family dispute, in which both sides have hired ace legal teams, raises important issues. One way of looking at this was offered by ReutersBreakingviews: it argues that shareholders in Murdoch’s businesses, particularly Fox, had done well relative to those in other large media groups in recent years and that their interests were therefore likely to be continued to be served best by keeping the business under a single supreme leader: “better an unelected emperor than a squabbling committee”.
I see it rather differently. Murdoch’s attempt to preserve the right-wing orientation of his media assets recalls the successful rearguard action by senior editors and journalists at the Telegraph and Spectator to convince the government to block their takeover by a US private equity company. They claimed at the time that they were seeking to prevent the titles falling under the control of a foreign government, even though as I pointed out at the time, the Abu Dhabi funds that were backing the RedBird IMI bid were clearly only passive investors with very limited rights under English law. But Andrew Neil, the Spectator chairman, gave the game away in a splenetic TV interview in which he declared that these “jewels in the crown of centre right thought” would not be safe in the hands of a liberal New York Democrat.
Yet a true centre right approach, the sort that the Telegraph and Murdoch papers would adopt if it was not their own interests at stake, would surely emphasise the importance of free market principles. At a time when the media market has never been more fragmented and diverse, why should legacy media groups need special protection? Isn’t the principle of one share, one vote fundamental to the efficiency of markets and worth defending, even when the beneficiaries are Murdoch offspring? And doesn’t free market orthodoxy teach that protectionism, whether of the sort that the Telegraph secured or Murdoch is seeking, is a recipe for rent-seeking and the protection of bad management, to the detriment of other shareholders?
Besides, what does it say about the state of the right-wing media that it feels it needs these protections? If the right wing media cannot survive on its own commercial merits then it must be in more trouble than it lets on, that the market for its hyper-partisan reporting, its constant prosecution of divisive culture wars and the endless promotion of the business interests of its oligarchic owners over the interests of its own readers may in fact be limited and dwindling. The fact that Murdoch of all people feels his media titles need protection makes me even more convinced that, far from the triumph of right wing populism that the right-wing media were assuring us was inevitable a few months ago, this year will prove populism’s high water mark.
The Pompeo plan does sound good and you are right that Biden has been feeble.
Proper sanctions have never been imposed on Russia. Exports to countries like Kirghistan from just about every advanced country, including the UK, have trebled or quadrupled, even from Poland where I am, and which has real skin in the game, and we all know where that stuff all goes. Too much cheating and close to zero political will to do anything about it that I have seen.
But would Putin throw in the towel and withdraw from Donbas and Crimea? He'd still need to be chased out by Ukrainians with arms. A Pompeo plan should shorten the war, but not end it immediately.
Putin cannot surrender. It would quite literally be the death of him. He's scared of dying. Remember those long covid tables? He's not going to commit suicide in his bunker.
The next putsch against Putin succeeds, he knows that presumably. All dictators know they can end up like Ghaddafi or Saddam.
Still, Russia is weaker than it looks. Running out of tanks and gun barrels. Not capable of making enough to replace losses. I read this in many places.
We have no data now, the Russians have stopped publishing economic numbers, and when they still did, quite likely they were lies. War economies may look strong, but if you channel money into making things which you will then blow up, it's not exactly a recipe for meaningful growth, is it.
If a Pompeo plan could be implemented, still plenty of fighting left, unless there's a sudden collapse which is also not unlikely.
Also, as you say, is he even part of Trump's team now?
Anyway, an interesting angle which I have not seen before.
The renewables story is a good news story despite what some commentators here say. Maintenance and renewal is an inherent cost that never gets properly calculated. That’s not a reason to dismiss the advances but a reason to address the challenges. Future proofing is a term that should be banned but not discounted totally.