The Age of Impunity

Thoughts on the death of the West, Trump's High Seas piracy, who gains from Bulgarian euro membership, could a stablecoin destroy Europe, and Substack versus Only Fans

Photo by David Clode on Unsplash

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Following my recent visit to Madrid, I spoke to El Economista about the end of the economic world as we knew it. You can read the interview here.

In this newsletter

• G7 in Canada: Death of the West?

• Seabed Mining: High seas piracy

• Bigger Bulgaria: Hail the eurozone’s 21st member

• Circle of Distrust: Could a stablecoin destroy Europe?

• Substack vs Only Fans: Your attention please!

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1. Death of the West?

It’s probably just as well that this week’s G7 summit in Kananaskis, Aberta, is likely to be overshadowed by the alarming events in the Middle East. The last time Donald Trump attended such a gathering in Canada of the leaders of what are supposed to be America’s closest allies, it did not go well. As Victor Cha, John Hamre, and G. John Ikenberry note in this piece for Foreign Affairs:

Trump arrived late; called for Russia’s readmission to the group (a nonstarter with the other members); described the host, Canadian Prime Minister Justin Trudeau, as “very dishonest and weak”; and refused at the last minute to endorse the joint statement at the end of the meeting.

This time, the prognosis is even bleaker. Since taking office in January, Trump has threatened to annex Canada and Greenland, launched a global trade war in which G7 countries are top targets, declared the European Union to be “worse than China”, effectively thrown Ukraine under the bus, parroted Kremlin talking points at every opportunity, exited the Paris accords and undermined global climate action. No wonder reports emerged last week tghat Carney had decided to dispense with efforts to agree a joint communique.

What’s at stake in Kananaskis is the cohesiveness of the West and its ability to exert any kind of collective leadership in an effort to maintain a rules-based international order. For the middle powers, which includes most countries in the world that are not America, China and Russia, this could hardly be more important. What we are seeing in the Middle East, and in Ukraine as well as in Trump’s attempts to coerce allies is the breakdown of global governance, a return to a might-is-right world where the big powers can act with impunity.

But if the G7 is incapable of rising to this moment, then others are likely to fill the void. The tensions between G7 members ahead of this summit are in contrast to the positive mood music at another multilateral summit that took place just two weeks ago that got practically zero coverage in the western media. The ASEAN-GCC-China summit held in Kuala Lumpur at the end of May brought together the leaders of countries in South East Asia and the Gulf states alongside Chinese premier Li Qiang to discuss “Synergizing Economic Opportunities towards Shared Prosperity” - and they did agree a communique.

What is striking about the communique is that it had little to say about geopolitics beyond a section to Gaza. Instead, it was almost entirely focused on economics and deepening south-south trade, with China positioning itself as the indispensable mid-wife to closer ASEAN-GCC links. What’s more, the communique is a robust defence of multilateralism using language that it is hard to imagine coming from a G7 with Trump at the table. Notably, they agreed to:

• Reaffirm “the central and indispensable role of the World Trade Organization at the core of the rules-based multilateral trading system”

• Cooperate to boost supply chain resilience and fostering new economic opportunities in industries such as digital and green technologies

• Explore cooperation on local currency and cross-border payments

• Promote “seamless connectivity” under the Belt and Road Initiative

• Work together towards “a sustainable, just, affordable, inclusive and orderly energy transitions in line with the Paris Agreement”

• Enhancing collaboration on renewable energy, clean/green energy, carbon capture, utilisation and storage (CCUS), biofuel etc

It is hard not to see in this a(nother) challenge to US and western leadership of the global economic order. Indeed, the fact that such a gathering could take place without any trace of western involvement sends a signal that the West is no longer considered relevant to cooperation in the Global South, says Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis.

How can and should the respond? Under the Biden administration, there was much talk of turning the G7 into “economic Nato” as it extended its remit into areas of common interest including technology, public health and wars. Cha, Hamre and Ikenberry argue in their Foreign Affairs essay that it should continue on this path. They also advocate strengthening the G7 by expanding its membership to include Australia, South Korea and Spain and arming itself with a permanent secretariat to provide continuity in focus between summits.

Is the G7 capable of pulling off such a transformation? The fact that Carney has invited the leaders of Australia, South Korea, India and Ukraine to join the summit is a positive step in this direction. As previously discussed, the West is incredibly fortunate that a leader of Carney’s calibre and experience has emerged on the global stage at such a consequential time.

But can Carney overcome the resistance of an America First president, who shows open contempt for the international law, is actively undermining the global trading system and has talked only of bringing Russia back into the G7? That’s hard to see. Meanwhile, Beijing can hardly believe its luck.

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3. High Seas Piracy

Multilateralism did at least get one very welcome boost last week. Following the United Nations Oceans Conference (UNOC) in Nice, it now seems certain that 60 countries will ratify the UN High Seas Treaty. That will enable the treaty, which was agreed by 193 countries two years ago, to come into force. This will be the first legally binding agreement on protecting international waters, which make up nearly two-thirds of the world's oceans and which are currently lawless.

But while this new addition to international law should help protect the oceans from the risks over-fishing and marine degradation, it may not be enough to protect the word’s oceans from Donald Trump. The US president issued an executive order in April that would give the green light to seabed mining in international waters, in flagrant breach not only of the new High Seas Treaty but existing international law under the Law of the Sea treaty.

The mining industry has long had its eyes on the ocean floor for its mineral-rich nodules, sometime as large as potatoes, which are a rich source of rare-earth elements such as manganese, cobalt, nickel and copper. But as David Helvarg, the executive director of Blue Frontier, an ocean policy group, noted in a piece for the LA Times, until recently, mining two to three miles below the ocean’s surface was commercially impractical. Now that is changing. The UN’s International Seabed Authority has already granted the Metals Company of Canada, known as TMC, and other companies exploratory permits for deep-sea mining.

Using massive mother ships, the companies deploy tank-tread “robotic excavators” (essentially, underwater bulldozers) or giant vacuum crawlers connected to pipes, pumps and miles of power cable. The Metals Company alone has recovered 4,500 tons of nodules.

Campaigners say that we know next to nothing about the ecology of the deep sea, let alone the impact of disturbing the seabed, including on the climate given that oceans are a carbon sink. That is why 33 nations, including France and New Zealand, have called for a moratorium on deep-sea mining and why some of the biggest tech companies including Google, Samsung, Philips, Volvo and BMW have pledged to keep deep-sea minerals out of their EVs and other products.

Attention will now turn to the International Seabed Authority which is meeting in July to discuss a global deep ocean mining code. Miners such as TMC are hoping that new regulations will allow them to push ahead with projects in international waters. But the US has never been a signatory to the Law of the Sea, which created the International Seabed Authority and the Trump administration has indicated that it will break with precedent and ignore whatever it decides. It is asserting the right under an obscure domestic law to issue permits in waters the rest of the world considers outside American jurisdiction.

The danger, of course, is that this sets off a global free-for-all that not only leads to the desecration of what David Attenborough in his recently-released film calls “The Last Wilderness”, but chips away at yet another piece of multilateral order.

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2. Bigger Bulgaria

Bulgaria’s impending adoption of the euro has not garnered much mainstream media attention. Nonetheless, the decision by the European Commission and European Central Bank earlier this month to give the Balkan state the green light to become the 21st country to adopt the single currency raises interesting questions about the future of Bulgaria, the European Union and the euro itself.

The first point to note is that this has been a long time coming. I first wrote about Bulgaria’s quest for euro adoption in a column for the WSJ in 2018. At that point, it already pretty much met all the necessary criteria, having pegged the Lev to the deutschmark and euro in the wake of a 1996 financial crisis, and endured a hair shirt fiscal strategy to sustain ever since. Indeed, as I noted at the time, Bulgaria was more compliant with euro zone rules than most members. Today it has a debt to GDP ratio of just 22 percent, compared to an EU average of 89 percent.

What was holding back its application at the time was politics, in particular concerns over corruption and the rule of law. Those concerns have not entirely gone away, as the reports make clear. Meanwhile, Bulgaria has become even more politically unstable in recent years, with seven general elections since 2021. What has changed is geopolitics, with Brussels keen to bind Bulgaria more tightly into EU structures. On other hand, domestic politics has become less enthusiastic about euro membership, with about half of Bulgarians opposed to joining, according to the latest Eurobarometer survey published in May.

The first question is whether euro membership will be good for Bulgaria. From an economic perspective, the answer ought to be an unequivocal yes. It should lead to lower transaction costs, lower interest rates and increased foreign investment. Freed from the need to maintain the currency peg, the government will also have more leeway to borrow and spend. That, of course, brings the risk of an inflationary boom, which is partly what lies behind domestic opposition. The Greek crisis of 2009-15 offers a salutary warning. A lot is riding on Bulgaria’s politicians and central bank to stick to responsible policymaking.

A second question is whether Bulgarian membership is good for the rest of the eurozone. One concern is that it increases geopolitical risks to the single currency, given that much of the opposition to euro membership is driven by pro-Russian parties. Spyros Andreopoulos convincingly deals with this in a new post for Thin Ice Macroeconomics. He points out that Bulgaria is far from the only country with a strong pro-Russian faction in its domestic politics. In that respect, France and even Germany are a potentially bigger risk.

Nonetheless, Bulgaria’s accession does highlight an existing vulnerability of the eurozone. In speech earlier this month, Christine Lagarde set out the steps that the EU would need to take to boost the international role of the euro. Step one was to become a more powerful geopolitical actor, able to offer investors assurances that it could provide reliable security guarantees to its trading partners and can back those guarantees with hard power. Left unsaid is that the most vital security guarantees are to its own members.

It has always struck me as odd the extent to which questions of economic security and military security tend to be divorced in the eurozone, discussed in separate spheres. Even now, three and a half years after Russia’s full-scale invasion of Ukraine and after six months of the Trump shock, questions of defence are almost exclusively addressed at the national level with little acknowledgement of the degree of security risks arising from financial interconnectedness. There has been little progress towards reforming the EU’s geopolitical capabilities which remain constrained by the demands of unanimity.

Bulgaria’s accession to the eurozone does not necessarily make these issues any harder - though it does extend the border of the currency area deeper into a potentially volatile region. But it does highlight why Lagarde’s ambitions for the euro are unlikely to be fulfilled - and why investors seeking a safe haven from Trump’s debased US dollar are putting their money in gold instead.

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4. Circle IPO

Many years ago, when I was working as an analyst for an investment bank, I was dispatched to Caracas for four months alongside an even more junior colleague. The project itself ended up going nowhere and the whole experience was mostly memorable for the fabulous social life we quickly established among Venezuela’s expat community of diplomats and journalists. I left banking shortly afterwards in a forlorn attempt to embrace my own inner Graham Greene.

But my colleague was a far more ambitious - and talented - financial whizz who was always destined for greater things. I hadn’t seen or heard of him for several years, but he recently popped up in my LinkedIn feed. He is now the chief financial officer of Circle, the US stablecoin issuer which floated on the New York stock exchange earlier month, the biggest crypto IPO sine 2021. It has since seen its share price rise 180 percent, valuing it at $20 billion. Bravo.

Until now, I’ve been inclined largely to ignore crypto on the basis that it seems to serve no useful purpose - and in any case, I struggle even to understand the technology. Stablecoins such as Circle may be a cut above Bitcoin in that every dollar of the currency is backed by a dollar of liquid US assets, so they do at least have a real value and you should therefore get your money back. But still, we already have electronic money via the banking system. Who needs stablecoins?

But perhaps it is time to rethink those assumptions. Not only is the Circle IPO evidence of the asset class moving mainstream, it is doing so with the blessing of the Trump administration whose GENIUS Act would give them regulated status, allowing them to be used for more than simply trading crypto. As Lionel Laurent noted in a column for Bloomberg, this could have profound consequences for the financial system - and in Europe’s case they may not be benign:

One reason why the Trump administration is so keen on crypto is that it sees stablecoins such as Circle as a source of demand for US Treasuries. Scott Bessent, the US Treasury Secretary, has cited speculation that stablecoins could create up to $2 trillion of demand for US government bonds. But what if stablecoins started to be widely used for online transactions in Europe? Given that 95 percent of then are dollar-denominated, it could rob Europe of monetary sovereignty:

Imagine if Amazon.com Inc. were to come up with irresistible shopping discounts for customers paying in AmazonBucks? Multiply an annual shopping basket of $2,700 by 350 million Europeans and you start to get to serious money — money which would indirectly contribute to keeping demand for dollar debt afloat in a more uncertain world.

Hence why Bank of France Governor Francois Villeroy de Galhau warned this week of the risk of death by stablecoin — literally “de-Europeanization” — for a continent that’s heavily dependent on the US for a host of services, from social media to Microsoft Corp. cloud computing to payments via Visa Inc. and Mastercard Inc.

The problem is that Europe does not have many good options. Its fightback is currently centred on the digital euro, a European Central Bank project to issue its own digital currency. But that is being resisted by the continents banks who fear that they will see an exodus of deposits if people prefer to hold an account at the central bank. It is yet another huge potential challenge to the global order - and to Europe’s place within it. I never had Jeremy down as a revolutionary.

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5. Substack vs Only Fans

I went last week to the first Substack summer party in London where it was wonderful to meet so many brilliant writers with expertise ranging from politics to finance to food who have built great audiences on this platform. According to Hamish Mackenzie, one of the co-founders, there are now 50 writers earning more than $1 million per year on the site. Obviously I am not one of them, but it was a reminder that Substack has been unambiguously positive for writers.

Of course, similar technology is also empowering other types of content creator. There has been a fair bit of coverage in the last week about Only Fans, following news that the UK-based porn-driven website may be up for sale for $8 billion. Having had a good deep dive into its finances in his latest Behind the Balance Sheet newsletter, Stephen Clapham wishes that the current owner would float it rather than sell to private equity as he reckons $8 billion is a bargain. ReutersBreakingviews agrees that it is cheap but thinks the discount is warranted given the various business model, legal and reputation risks.

Meanwhile the The Economist's Bagehot column looks at the depressing cultural phenomenon that is Bonnie Blue, one of Only Fans’s more notorious creators whose extreme stunts include having had sex with a claimed 1,057 men in 12 hours. It sees her extraordinary financial success - she is reputed to have made £600,000 a month - as a metaphor for Britain’s thriving services sector:

After all, London is stuffed with advisory agencies staffed by smooth men with pinky rings who will tell any story for a fat monthly fee. Ms Blue simply did it for herself. If Britain has a world-class sin sector, its bullshit industry is second to none. Attention is a powerful thing and Ms Blue knows how to get it.

Cynics might regard Substack as another manifestation of this “bullshit industry” with its own in-built incentives to extremism. But I think that is profoundly wrong, as Ed West explains in this brilliant post on the difference between Substack and writing for the traditional media. He makes the point that almost all the Substack millionaires are centrists with very middle-of-the-road opinions, far more restrained than the rage bait frequently found in broadsheets:

The reason that very successful substacks tend to be moderate is perhaps because there is more long-term advantage to it. It is easier to capture the world’s attention by saying outrageous things which are controversial and unsourced, but it’s a short-term strategy that doesn’t pay off over long periods. Substack is not part of the attention economy, and in a world where the attention economy itself is over-saturated and competing for attention, that explains its popularity.

Certainly that is the way I approach what I write here. If you agree and would like to support this project, please do consider becoming a paying subscriber!