Ultimate Fighting Chances
Europe's defence incapability gap, why Britain's Brexit reset has reached its limits, will Europe get steamrollered by China shock 2.0, who's afraid of Jordan Bardella, and the first AI World Cup
Here’s this week’s newsletter, much of it reflecting on conversations during an interesting few days in Brussels last week. If you want to watch the video of the panel discussion I joined on the lessons of Brexit Britain for the EU, here’s a link. I’ll be back in Brussels next week for a couple of days, so get in touch if you would like to meet.
In the meantime, a warm welcome to new subscribers. If you find this post useful, please do consider becoming a paid subscriber as it’s the generous support of paying subscribers that keeps this going. At the least, you can show your appreciation by hitting the “like” button which helps with the algorithms and sharing it widely with anyone you think might be interested. I look forward as always to your comments and feedback.
European Defence: Incapability Gap
Brexit Reset: Stumbling bloc
China Shock 2.0: Steamroller ahead
French Elections: Bardella Time?
World Cup: Data games
1. Incapability Gap
As I write, the world awaits confirmation that Trump’s peace deal with Iran, previously announced 39 times to be imminent, has finally been signed — by an electronic equivalent of the autopen, naturally, since no human being wants their physical signature on a deal likely to be as humiliating as anything that a US administration has agreed in the 250 year history of the Republic.
Of course, it’s not really a peace deal, but a Memorandum of Understanding on a 60-day extension to the current ceasefire during which Iran will reportedly reopen the Strait of Hormuz in return for the release of $24 billion of frozen assets and the two sides will continue negotiations on the future of Iran’s nuclear programme, apparently on the basis that what Trump calls the “nuclear dust” will remain in Iran. Perhaps when the details emerge they will surprise us, but it seems certain to be far from the clear-cut victory that Trump has promised.
Besides, even if Trump does succeed in drawing a line under his reckless war of choice, it would be a mistake to think the world will have become a safer place. Trump's erratic and unreliable decision-making in Iran and elsewhere has undermined America's coercive power and weakened its deterrent effect, making the world less predictable and more dangerous. As the Brookings Institution notes, it has confirmed Iran's control of the Strait of Hormuz, with implications for the world's other maritime chokepoints; exposed the limits of US naval power and strained the US alliance system; and accelerated China's rise on the global stage, not least because its ally, Iran, will emerge strengthened from the war.
For Europeans, all this has been compounded by the administration's undisguised haste to decouple from the continent, leaving Europe potentially far more vulnerable, not least to Russia, which is constructing barracks and military warehouses on the Nato border and which military experts say could be in a position to launch an attack on a Nato country by the end of the decade.
Last week, the New York Times reported that the Trump administration has told allies it intends to dramatically scale back its commitment to European defence, including by cutting the number of fighter jets based in Europe by a third, cutting all eight aerial refueling tanker jets previously available to Europe, and reallocating a missile-launching submarine and an aircraft carrier, along with several warships and scores of jets that join the carrier’s missions. It also comes just days after it emerged that the Pentagon is likely to cancel a German order for Tomahawk missiles for fear of antagonising Russia.
That is the context in which last week's extraordinary row in the UK over defence funding needs to be seen. The resignation of defence secretary John Healy and armed forces minister Al Carns, in protest at what they regarded as a wholly inadequate plan for military investment, was not merely a domestic political drama. It was a signal of just how wide the gap has become between Europe's security needs and any government's willingness to pay for them. A report in The Sunday Times spells out the full unvarnished horror of the state of the UK forces:
Britain has about 8,000 drones in its arsenal. In comparison, Ukraine is using roughly 200,000 a month in its war against Russia. Meanwhile Russia is capable of producing about seven million small, first-person drones and eight million kamikaze attack drones a year.
Of the UK’s 107 advanced Typhoon fighter jets, only four are armed and ready to scramble at any one time. There are no missile interceptor batteries in the UK and the government began purchasing small numbers of drone interceptors only this spring. The exact figure is not known.
The UK has five active hunter-killer nuclear-powered submarines designed to track and attack enemy subs, yet all of them are currently held up in port receiving maintenance.
Britain’s fighting fleet comprises six Type 45 destroyers and two aircraft carriers. However, only half the Type 45s are operational. In contrast, Russia’s northern fleet alone, stationed just over 1,200 miles from the UK in the Arctic Ocean, comprises about 30 submarines, two cruisers, three destroyers, three frigates, seven corvettes and multiple support vessels.
In May 2025, Exercise Hedgehog, a military training exercise in Estonia designed to wargame our capabilities, resulted in a British tank battalion, including 17 armoured vehicles, being “wiped out” in half a day by ten Ukrainian drone operators. With the army at its smallest for more than 200 years, at 33 regular battalions containing 700 soldiers each, the loss of just one would be significant.
Perhaps the row provoked by Healy’s resignation in what may prove to be the dying days of Sir Keir Starmer’s prime ministership will have done the country a favour if it injects some reality into a UK political debate that, as Professor Jamie Gaskarth noted in an analysis for Chatham House, has long been delusional.
UK policymakers continue to see Britain as a leading military actor —committing Britain to maintaining its status as a nuclear power, indeed extending it via the AUKUS submarine programme, providing a peacekeeping force to Ukraine, leading a freedom of navigation mission in the Strait of Hormuz; and taking on more responsibility for European security — without providing the capabilities needed to deliver all these goals or even keep the country safe. This was humiliatingly exposed at the outbreak of the Iran War when the country was unable even to deploy a ship to Cyprus when its own base came under attack.
It’s quite clear that Britain needs to face up to the world we are now in and make some big strategic choices that it has been avoiding for years, hiding behind comforting delusions that it can do more with less, fund budget black holes with efficiency savings, and always count on being the junior partner to the Americans. As Gaskarth says, “if it’s honest, [the government] will finally have to make a choice between focusing on capabilities to defend the mainland UK and the Arctic and ‘High North’ or opt for a massive effort to reconstitute its ability to project force around the world – with all the associated costs.”
But these are not just British choices. They are European ones, and they need to be taken in an utterly transformed context in which US support can no longer be counted on and a huge question mark hangs over NATO's article 5 mutual defence clause. The recent destruction of a Romanian apartment bloc by a Russian drone was a reminder that Europe is already facing a hybrid war. Yet much of last year's Strategic Defence Review and the Defence Investment Plan that flows from it already look written for a bygone era, with continued purchases of new tanks even as tanks have all but disappeared from the battlefield in Ukraine, £6 billion earmarked for the troubled Ajax armoured vehicle programme, and money for helicopters that the army apparently no longer wants.
The answer should be a far greater degree of European cooperation on defence procurement — joint programmes to build the capabilities no single country can afford alone. Yet last week also brought the collapse of FCAS, the Franco-German-Spanish next-generation fighter programme launched by Macron and Merkel in 2017, an €80-100 billion project that was meant to be the backbone of European air power for decades, killed by a Dassault-Airbus workshare dispute. Meanwhile Britain walked away from what seems a worthwhile Canadian initiative to establish a joint defence investment bank.
The next few weeks will see an intense schedule of summitry, starting with the G7 in France on Monday, followed by the European Council at the end of the week and the Nato leaders summit on July 7. Europeans are running out of time to get their act together. We will soon find out if they can.
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2. Stumbling bloc
One summit that was expected to take place before the summer holidays but is now looking much less certain is the UK-EU summit that was meant to mark the next stage in Sir Keir Starmer’s much-vaunted Brexit reset. This had been pencilled in for July 14, but is now looking much less certain as the two sides have yet to reach agreement on key details of the deals reached at last year’s meeting.
The principal stumbling block is the plan for a youth mobility deal, a key EU ask, which has run into trouble over EU demands for their students to be given access to British universities at the same fees as domestic students, and UK demands for guaranteed working rights for eligible Brits across the bloc, which requires changes to some national immigration rules.
More broadly, the two sides are struggling on where the reset process should go next, once it has delivered on previously agreed plans for a food standards agreement and an electricity market deal. The UK government has already announced its intention to dynamically align with EU regulations in the hope of gaining greater access to the EU single market. But the EU is sticking resolutely to its “no cherry-picking” mantra and a UK proposal for a deal based on access to the single market for goods was swiftly rebuffed, leaving the process stalled.
None of this will come as a surprise to Wealth of Nations readers. The only surprise is that it seems to have come as a surprise to some in the British government, which only shows how poorly the EU is understood. Brussels continues to insist that the four freedoms of the single market - of goods, capital, services and movement of people - remain indivisible for the simple reason that if you allow jobs to migrate across the single market, you have to allow people to move across the continent to take them. Brits have never understood this, even as they became by far the biggest beneficiaries of it as a member when the lion’s share of Europe’s financial services sector decamped to London.
Even so, nothing will stop the British political and media class indulging in fantasies about new half-in, half-out relationships with the EU, as they have done for much of the last 80 years. Recent attention has focused on some version of the deal recently agreed between Switzerland and the EU which allows single market access without full membership. Yet the Swiss model fails for the simple reason that the EU has said it is not interested in such a relationship with Britain. Even if it were, the deal codifies a set of arrangements that took the better part of 50 years to negotiate and would in any case require big EU budget payments, free movement, and compliance with EU rules with no say over making them, all of which would be politically neuralgic in Britain. For their part, European officials fantasise about Britain rejoining the EU customs union and single market, even though both of these would effectively consign Britain to being a rule-taker.
The reality, as some involved wearily admit, is that Labour’s reset has reached the limits of what can be achieved under Starmer’s red lines. Meanwhile the return of political instability to Britain, combined with strong support for right-wing anti-EU parties in the polls, is making the EU increasingly wary of wasting scarce bureaucratic bandwidth on any negotiation with Britain. Those who believe that Britain needs a far closer relationship to the EU than the one negotiated by Boris Johnson need to acknowledge that the choice is binary (see The Overwhelming Case for Rejoin). Those who believe that the status quo is perfectly adequate need to ask themselves whether it can withstand a fast-changing geopolitical landscape, in which Britain risks getting isolated in a world of competing blocs.
3. Steamroller Approaching
One early signal of how this rapid transition to a world of competing blocs might unfold will come at next week's EU leaders' summit. On the agenda will be a discussion of "competitiveness and global economic challenges" and "One Europe, One Market, EU Council president Antonio Costa wrote in an invitation letter to EU leaders, “while the dinner will focus on "global macroeconomic imbalances.” Although not mentioned by name, this is all about China.
China may have dropped off the front pages for much of this year while the world has inevitably been mesmerised by the Trump Show and associated chaos. But, as became clear when I was in Brussels last week, alarm bells are ringing loudly across the EU at what is being dubbed the “China shock 2.0”. As a recent report by France’s strategy commission put it, European industry risks being flattened by a “steamroller” of cheap Chinese exports targeting the highly advanced manufacturing sectors that fuel the European economy.
As Etienne Soula at the German Marshall Fund notes:
When Beijing joined the WTO in the early 2000s, Europe survived the first “China shock“, a wave of cheap toys, textiles, and basic electronics that hollowed out low-end manufacturing across the developed world by moving up the value chain. This time there is no higher ground to retreat to: Chinese manufacturing has followed European industry up that chain and now competes with what is left of it.
The scale is hard to overstate. With America walling itself off behind tariffs and Chinese EV bans, China's vast manufacturing overcapacity flows toward whomever remains open — and the EU is the obvious destination. The Centre for European Reform puts China's manufacturing surplus at around $2 trillion, roughly the size of Italy's entire economy. To take one example, China has built capacity for roughly 25 million cars a year against a home market barely half that size. France's strategy commission estimates the share of national manufacturing output exposed to abnormally strong Chinese competition at roughly 70% in Germany, 60% in Italy, 40% in Spain, and 36% in France.
How should Europeans respond to this threat to their industrial base and in particular an automotive sector that employs directly and indirectly 13 million people? A move last year to impose tariffs on Chinese EV imports has had negligible impact. Now the Commission is proposing an even more radical move in the form of an Industrial Accelerator Act (IAA). This would set “Made in Europe” content thresholds in procurement and major investments. Potentially, this could pose a serious risk to the UK, if excluded.
Nonetheless, forging a consensus on this won't be easy. Five member states published a joint non-paper earlier this year proposing radical action in response to Chinese overcapacity, but two of them, Germany and Spain, are already backing away. That's partly because Beijing has warned of "countermeasures," which could see European firms, including automakers, shut out of the Chinese market, but also because Chinese components feed into European manufacturing supply chains, leaving them vulnerable to retaliation.
Meanwhile, one of the most obvious routes to rebalancing global trade remains off the table, in large part because of the US-China trade truce. As Shahin Vallée and Brad Setser argue in Foreign Affairs, a key source of China’s competitive advantage stems not just from subsidies and production efficiencies, but an artificially devalued currency.
Since the COVID-19 pandemic, China has seen steady technological advances and rising productivity in a number of industrial sectors. These are developments that should normally cause the renminbi to appreciate. Yet it has depreciated by roughly 15 percent in real terms. The IMF suggests that a 15 percent depreciation should increase China’s net exports by between two and 2.5 percentage points of China’s massive GDP—not far from the three percentage points of GDP rise observed in the last two years.
Europe’s problem is that there is no answer to this China shock 2.0 that does not involve considerable economic pain: either in the short-term if it wants to preserve its industrial core, as it boosts its defences, thereby risking a trade war; or in the longer-term, as its traditional industrial base is hollowed out. The tragedy is that this could have been something on which the US and Europeans could have worked together to confront China. But with the Trump administration distracted by Iran and preferring to undermine rather than work with allies, Beijing considers itself under no pressure to engage.
4. Bardella Time?
One name kept coming up in almost every conversation I had in Brussels last week: Jordan Bardella. It is now less than a year until the French presidential election and unless a court ruling due on July 7 overturns Marine Le Pen’s conviction for embezzlement of EU funds, he will be candidate of the far right National Rally — and all polls show him winning the first round of voting.
Already, the prospect of Bardella presidency is having an impact on French and European politics. Last month, a former close aide to Emmanuel Macron was installed as Governor of the Banque de France after the previous incumbent stepped down early to ensure that the appointment wouldn’t be left to Bardella. There is speculation that Christine Lagarde may similarly step down early as President of the European Central Bank so that her successor can be installed before the French election.
Meanwhile next week’s EU summit will include a discussion on the next EU budget, with the goal of finalising it by the end of this year even though it will not take effect until 2028. Bardella himself has called out the manoeuvre, condemning what he called a "headlong rush" to provide the EU with a budget "before the French presidential election, contrary to the usual timetable, and all in order to force the hand of the next president." Brussels is taking no chances — and Bardella knows it.
Is Brussels right to be so worried? After all, there was similar anxiety about the arrival of Georgia Meloni as prime minister in Italy, yet she has gone on to play a strikingly constructive role in European politics. In recent weeks, Bardella has gone out of his way to distance RN from Donald Trump, a shrewd move given the fate of Viktor Orban who welcomed Trump’s endorsement. His mantra is that “we want to change everything without destroying anything”. Meanwhile, in a recent interview with French magazine Le Point, Bardella insisted his model for dealing with European issues would be German chancellor Friedrich Merz.
Nonetheless, there was enough in the interview to ring alarm bells across the EU: a restriction of free movement rights to EU citizens, with the resumption of border checks to block everyone else, citing Germany’s border controls; a referendum to assert the primacy of French law over EU law, citing the German constitutional court as a precedent; a move to subsidise French domestic electricity prices at close to production costs, citing Germany’s decision to subsidise domestic industrial energy prices; a demand for a rebate to the EU budget; an end to EU aid to Ukraine and opposition to Ukrainian membership. The rhetorical trick is revealing: Bardella cites German exceptions as justification for blowing up the rules entirely.
Meanwhile in a press conference last week, Bardella was clear that if he won, he would demand Ursula von der Leyen’s resignation as Commission president: “We have fought, we are fighting and we will continue to fight the politics of the European Commission. And we consider that she should go.” What seems clear is that the EU has a rapidly closing window of opportunity to achieve anything in confronting its many challenges before the shock that may be coming.
5. Beautiful Data
You may have heard that the World Cup is underway, though since football is not really my bag I won’t be among the estimated 6 billion people paying close attention, at least until the later stages. Nonetheless, the scale of the tournament means that it is not just a sporting event: it’s an economic event too, expected to increase US GDP alone by $17 billion and create nearly 200,000 jobs. What’s more, this being 2026, the World Cup is inevitably also a massive AI event, the first in which the data itself is a primary product. According to Bank of America:
All teams will have access to real-time AI models that analyse millions of data points, as well as real-time event 3D simulations to build their strategy. If in the past rich teams had an advantage, in 2026 AI will democratize data and give all similar chance. All teams are now using AI to parse real-time performance metrics that didn’t even exist in the last tournament. We aren’t just watching a game; we’re watching a massive, real-time simulation where the “physical” world is being mirrored by data into data at a rate of several petabytes per week.
A petabyte, in case you were wondering, is roughly equivalent to 13.3 years of HD video. And since the World Cup is estimated by SanDisk to generate more than 90-petabyte (PB) of data, which is 45 times more than during the Qatar 2022 World Cup, that is the equivalent of 1,200 years of HDTV footage in just over a month. And that excludes social media, selfies, mobile device interactions, and other platforms. Including them, BofA reckons the tournament could generate 2 exabytes, which is 45,000 years of 4K video.
As for who will win, BofA’s AI model says France (or maybe Spain).
Ukraine has shown that all recent authoritative statements about war are already out of date. Surely the risk of plunging into vast military expenditure could be a grest waste of money. War has changed
I’d be quite sceptical about both generals and the MoD/industrial nexus with their love of big kit.