• Britain’s Last Hurrah

    Britain’s Last Hurrah

    Attitudes to the British Empire are greatly divided. If you were part of that Empire you do not have a lot to be thankful for. The problem for modern Britain is that some of the most powerful countries on the planet have been damaged by and hold no great lingering affection for its lost empire. The U.S, India, South Africa, Russia, Saudi, and China have had wars with Britain. There are many more, much smaller, that could be mentioned.

    However, if you are British a great deal of your identity is sublimated in the Empire. Quite a lot of English people are nostalgic and enthusiastic about the British Empire. For them the Empire was a glorious period, a time when Britain excelled. In this conception of things, Britain was bringing civilisation, in Kipling’s words, to “lesser breeds without the law.” The British celebrity historian Niall Ferguson wrote an accomplished book on the Empire titled Empire: How Britain Made the Modern World, but even he does not often list it alongside his global bestsellers such as the Ascent of Money. Ferguson’s Empire book was the subject of telling criticism from colleague historians drawn from countries that were previous British colonies. He tries to be balanced but it is impossible to put an overly positive gloss on a particularly savage past. 

    The rehearsed, media-led, emotional outbreak over the death of Queen Elizabeth II is all to do with longevity and a bounding, eternal connection with a monarch who grew up in the shadow of the second world war.

    If there is one event in England that conjures up all that dormant imperial spirit it is of course the annual ‘Last night of the Proms’ broadcast live by the BBC from the Royal Albert Hall in central London. The event gives free rein to the audience to delightedly wave Union Jacks and join in the proverbial anthems of Rule Britannia, Jerusalem and of course God Save the Queen, which will now change to King. It is middle class patriotism alongside a slight jingoistic yearning for the past, all done in a night’s fun and simultaneously broadcast on big screens in the United Kingdom’s national capitals – London, Cardiff, Edinburgh and Belfast.

    Like the recent obsequies for Her Majesty Queen Elizabeth II, the event could be interpreted as rather over the top. It is the ritual and literal role of the modern day monarchy to throw a pleasing fig leaf of pageantry around the notion that Britain still has some form of global power and influence – even if the prosaic reality is that power has shifted further west to Washington D.C and east to Beijing, not to mention Brussels. The Empire is no more; the extended period of mourning for the deceased monarch had the noisy echo of ancient history being played out in a country that is rapidly resembling an imperial museum.

    “The British monarch’s modus operandi is to provide a lot of pomp and ceremony to the role.”

    The UK’s obsession with Royalty is genuinely puzzling to those outside looking in. The amount of media, newspaper and television coverage devoted to the goings on of the Royals seems a distraction from more significant issues affecting Britain. It is as if the British media and public cling to such shibboleths like a life belt rather than contemplate or consider the cold stormy seas that year on year increasingly take the great out of Great Britain. The decline curve in Britain has taken another steep drop since the 2016 referendum when they voted to remove themselves from the European Union. The decision to quit the European trading bloc, thus exacerbating its soaring trade deficits, is viewed by level-headed diplomats, both British and non-British, as a piece of madness or the act of a nation hell bent on self-harm.

    The rehearsed, media-led, emotional outbreak over the death of Queen Elizabeth II is all to do with longevity and a binding, eternal connection, with a monarch who grew up in the shadow of the second world war. Apart from the Royal family, the other compelling subject matter that is lovingly repeated time and time again over the British airwaves and media, are the endless documentaries that suggest that Britain alone won the last world war. This pleasing fiction takes little or no consideration of the fact that it was lost Russian lives and American money that paid the biggest price in that conflict. It clearly pains ordinary Britons that the biggest beneficiaries of that war were, perhaps perversely, the U.S., the Soviet Union and within a few decades a newly energised industrial giant in the shape of a reunified Federalised Germany – the behemoth of the EU economically.

    It is almost a cliche at this stage to quote the U.S. Secretary of State Dean Acheson when he stated in the 1950s that ‘Britain had lost an Empire but not yet found a role.’ The quotation remains pertinent. The role model of the monarchy and its many splendours continues in its own merry way to feed a public delusion that the UK is a far greater power in the world than it actually is. “Part of the British royal family’s success is as the world’s longest-running soap opera. With the proviso that the entertainment should never deflect from the faux-sanctity that surrounds the throne, part of royalty’s job is not to be boring,” according to author Matthew Engel writing in the Financial Times

    The reaction from people on hearing of the late, lamented monarch’s death was testament to the value of having a titular or symbolic head of state who is punctilious in being above partisan politics and therefore able to provide a certain stability in the topsy turvy world of the public realm. The monarch has no power, can allocate no resources but can endorse and encourage worthy as well as good civic behaviour. The British monarch’s modus operandi is to provide a lot of pomp and ceremony to the role. It, the monarchy, can even argue by way of self-justification that the institution is good for business, tourism, investment and the image of Britain. The new incumbent King Charles III, is already making the case for a slimmed down monarchy – perhaps more in keeping with his own modest ambitions around the environment, architectural heritage and excluded communities. 

    Charles III comes with a long apprenticeship and of course difficult experiences in his own personal life. Much damaged over his treatment of his first wife, the late Princess Diana, he has lived to succeed to the throne and has emerged with a modicum of respect which if he does not intrude too much into the public field may chime well with a reduced or slimmed down monarchy. He is one of the first members of his family to attend university, Cambridge no less. Those that come into close contact with him state he is intelligent. Those that have not been in contact with him conclude that he is stupid mainly it seems because of his ponderous and boring style of speech.

    Those that advocate for an abolition of the monarchy in the UK are an extreme minority. They have as little chance of seeing change in the UK as have people who argue for a radical transformation of an institution like the Vatican in Rome. Foolish or not as might be the case, ordinary Brits are well pleased with their constitutional arrangements and are in no hurry to change them. The fact that the UK has had four different prime ministers over the past few years underlines the stability provided by the monarchy. 

    Britain’s role in international matters may still prove to be influential but not anything like it used to be. It is now a middle ranking power separated from the European continent. The historic role applied by itself to itself for hundreds of years prior to the 20th century’s catastrophic world wars, was to preserve the balance of power in an otherwise fractious and divided European continent. That role was cast aside in its decision to abscond from the European economic realm. There is an implicit recognition of this in Charles’ decision to have a slimmed down monarchy. The reality is that the next few years may feature the departure of both Scotland and Northern Ireland from the union, as well as a breakup of Commonwealth Nations. That of itself implies a downsizing of Britain’s overseas ambitions. Behind the pomp and circumstance of the monarchy is the threadbare reality of a country that is declining in many, many ways. 

  • Scorched Earth

    Scorched Earth

    War precipitates change – and major war precipitates major change. It is rare that war shifts historical developments onto a different track; rather, it tends to accelerate trends that are already underway. War brings out the weaknesses in economic and geopolitical relationships – collapsing structures that were already shaky. War also accentuates strengths, giving emerging powers a
    chance to test their mettle against the incumbents.

    In 1919 the British economist John Maynard Keynes published his book The Economic Consequences of the Peace. The book was based on his experience as a delegate of the British Treasury during the Paris Peace Conference of 1919. Keynes believed that the terms on which the Treaty of Versailles were established were unduly punitive to the Germans and their allies.

    Crucially, however, Keynes was not making this judgement from a moral point-of-view, rather he made the case from the point-of-view of European stability. Keynes recognised that there is no clear demarcation between economics, politics, and war. He thought that imposing such harsh terms on Germany would lead to economic ruination which would spread across Europe, and he predicted that this could result in destabilisation later. He wrote:

    Economic privation proceeds by easy stages, and so long as men suffer it patiently the
    outside world cares very little. Physical efficiency and resistance to disease slowly diminish,
    but life proceeds somehow, until the limit of human endurance is reached at last and
    counsels of despair and madness stir the sufferers from the lethargy which precedes the
    crisis. The man shakes himself, and the bonds of custom are loosed. The power of ideas is
    sovereign, and he listens to whatever instruction of hope, illusion, or revenge is carried to
    them in the air.

    In the winter of 1919, as the book hit the shelves in Britain and the United States, acute fuel shortages occurred in Germany and Austria. Photographs of the Viennese poor collecting firewood in the Vienna Woods and then waiting for trams to return home were published. Fourteen years later, after experiencing hyperinflation and then depression, the German people elected Adolf Hitler as
    chancellor. Six years after this, Hitler invades Poland and so began the Second World War.

    The rouble has increased in value by 23% against the US dollar while the Russian economy looks set to contract by a meagre 3-4%.

    Since 1919, our societies have become more commercial, not less. More of our lives are intertwined with commercial transactions and so our lifestyles rely more on economic activity than they were in the past. This means that the demarcation between the economy and politics and war are even less
    clear cut than they were in the past. We see this in the notion of hybrid or economic-based war today. When Russia invaded Ukraine in February 2022 the first response of the Western nations was to declare what amounted to full-scale economic war against Russia.

    But as with the sanctions imposed on Germany and her allies after the First World War, economic warfare against Russia has not produced the results that many thought it would. After the sanctions were put in place President Biden claimed that they would “reduce the rouble to rubble” and that Russia would go from being the eleventh largest economy in the world to falling outside the top
    twenty – this implied a decline in Russian GDP of around 55%. Needless to say, that is not how things have played out. At the time of writing in September the rouble has increased in value by 23% against the US dollar while the Russian economy looks set to contract by a meagre 3-4%.

    Meanwhile, the economic consequences for the Western-aligned countries have been profound. Europe as a whole, including the United Kingdom, face a dismal winter of energy shortages and crippling inflation. This has become obvious recently but the worldwide consequences of the economic warfare undertaken this year will reverberate for years to come.

    Britain’s manufacturing sector is now so small the country may take decades to recover these lost living standards and may have to settle for living standards like some Eastern European countries.

    The United Kingdom has long been in a precarious situation economically. Up until the 1970s, the British manufacturing sector was large, stable, and robust, clocking in at around 25% of GDP. Today Britain’s manufacturing sector is extremely small, being less than 10% of GDP. Since Britain make less stuff domestically, they must import it from abroad. This has given rise to a large trade deficit in the UK. At the beginning of 2022 the current account deficit hit record levels of 7.1% of GDP. Britons are allowed to live beyond their means because foreigners are willing to loan them money. But with the sanctions and their consequences that may be changing. The sanctions and counter-sanctions have resulted in soaring inflation in Britain and energy shortages. Some analysts are predicting that the current account deficit may rise to around 10% a year. This is a level typically associated with severely dysfunctional economies in the developing world. There are already hints that financial markets may soon start to dump sterling en masse. This would result in a collapse in the currency and a massive decline in British living standards. Since Britain’s manufacturing sector is now so small the country may take decades to recover these lost living standards and may have to settle for living standards like some Eastern European countries. In such a situation, Britain’s military budget will likely contract significantly, and Britain will wane as a serious military power.

    Not only will Europe’s economy likely collapse due to the war but plans to rearm the continent seem unlikely to work.

    The aftermath of the sanctions has shown just how dependent the European economy is on Russia. When the sanctions were being imposed there was much talk about Russia having an economy the size of Italy. This has proved enormously misleading. First of all, when measured properly – using a
    price-adjusted PPP GDP metric – the Russian economy is closer to the size of Germany’s economy than to Italy’s. Secondly, and more importantly, Russia disproportionately produces the raw material that the European economy requires. The most obvious of these is energy: Russia provides
    around 40% of Europe’s gas and around 30% of their oil. But Europe also relies on Russia for products such as fertiliser, with Russian imports accounting for around 34% of European nitrogenous fertiliser. These products are key to economic growth. Without adequate fertiliser, for example, there will not
    be adequate food – and without adequate foods there will be political instability and turmoil. Without adequate energy, everything shuts down. The products that Russia exports to Europe are not easily substitutable knick-knacks that play no role in the broader economy. Rather they are some of the inputs that form the very heart of a modern industrial economy. Nor can Europe simply
    import them from elsewhere. Substitutes for piped natural gas such as LNG, for example, are expensive, difficult to transport and in limited supply. Not only will Europe’s economy likely collapse due to the war but plans to rearm the continent seem unlikely to work. With energy lacking, many primary metals producers are having to shut their doors. With raging inflation, collapsing trade balances, energy shortages and metals factories going offline, it seems far-fetched to think that Europe can engage in adequate arms production to fully rearm. In fact, the most likely outcome is precisely the opposite: now that Europe has sent much of their stockpiled armaments to Ukraine, it is likely that the continent will emerge from the war and the economic sanctions disarmed and impoverished.

    American hegemony… is beginning to decline.

    Unlike Europe and the United Kingdom, the immediate impact of the sanctions on the United States have not been catastrophic. Certainly, there has been an impact on prices – especially fuel prices – but in contrast to the other Western NATO countries the United States is not faced with any immediate crisis scenario. Yet the long-term damage to American hegemony is now clear. Firstly, the seizing of Russia’s foreign exchange reserves has likely precipitated the long-term declin of the status of the US dollar as the world’s reserve currency. The seizure has signalled to other countries that their US dollar reserve holdings can be seized if the United States strongly opposes their foreign countries. For most countries, this means that they will not be able to hold most of their reserves in US dollars in the future. This opportunity is being seized by Russia and China who are floating plans to launch a commodity-backed BRICS – Brazil, Russia, India, China and South Africa – reserve currency in the near future. China is the world’s major manufacturing nation, and the other BRICS are key commodity suppliers, so there will almost certainly be ample demand for this new currency. Relatedly, American hegemony over the global payments system through SWIFT is beginning to decline. After the United States banned Russia from SWIFT settlements, various countries started to form bilateral payments relationships utilising their own clone systems. Bilateral payments settlements are likely the way of the future. Secondly, and related to the decline of the US dollar as the world’s reserve currency, the BRICS trade
    alliance looks set to expand massively. Reports suggest that the following countries may soon be applying for membership: Argentina, Egypt, Indonesia, Kazakhstan, Saudi Arabia, United Arab Emirates, Nigeria, Senegal, and Thailand. If even half of these countries get on board this would represent a serious rival trade bloc that controls much of the world’s natural resources. Particularly notable on the list is Saudi Arabia. Not only is Saudi Arabia one of the key oil producers in the world, it has also been a reliable Western ally for nearly 40 years. Saudi’s defection to the new BRICS+ signals a serious shift in how the rest of the world views America’s continued claims to hegemony.
    Thirdly, there is a good chance that the Western alliance itself will now collapse. Europe will not allow its economy to be destroyed in perpetuity. Just as Germany rose from the ashes in the 1930s, Europe will elect new leaders that will move them away from the NATO-led sanctions regime. It seems likely that these new leaders will be right and left-wing populists who are opposed to both
    NATO and the European Union. The most probable trajectory for the collapse of these organisations is that a few countries with relatively early elections (like Italy) elect populist politicians with a mandate to remove the sanctions. These politicians then run into conflict with NATO and the EU over the lifting of the sanctions and are eventually forced to leave one or both organisations.

    As Keynes presciently noted in 1919: When a population is faced with a massive decline in their living standards and grinding poverty they will “listen to whatever instruction of hope, illusion, or revenge is carried to them in the air”.

  • Germania Unmasked

    Germania Unmasked

    Angela Merkel exited the German political stage just in time. She departed the German Chancellery on December 8, 2021. Just over 70 days later, on February 24, 2022, Russia invaded Ukraine. The resulting crisis has profoundly undermined the foundations of Germany’s post-war foreign policy and is forcing it to be fundamentally changed.

    When hostilities ceased in the European theatre of World War 2 in May 1945, Germany was utterly destroyed. Its moral pretensions had been eviscerated by its treatment of its Jews, its Soviet prisoners of war and countless others whom met the wrath of Nazi depravity. It had lost over 6 million people due to the war. It lost over a quarter of its pre-war national territory, as a result over 12 million ethnic Germans were forced out of their homes in Eastern Europe and other territory that had previously been German. Its cities had been flattened by aerial attack. Its remaining territory was divided and administered by the Allies. And, in eastern, Soviet-occupied territory, its industry was plundered. 

    What were the political consequences of this searing catastrophe? 

    The political establishment of the German state, that clambered out from the ashes of war in West Germany, resolved both to improve the material position of its citizens and to eschew the imperial aggressiveness that had led Germany to destruction in 1914 and 1939, respectively. ‘Nie wieder’ (never again) became the watchword of German government strategy for years to come.

    In the initial years after the foundation of the Federal Republic, German policymakers kept their heads down and worked on being unobtrusively good citizens on the international stage. Western Europe was only enjoying a faltering economic recovery that was to require substantial American assistance in the form of the 1948 Marshall Plan. Germans were largely still hated by ordinary people in neighbouring states. And, for the political elites of those countries, the German state was still on probation, similar to as it had been following the first World War. It was the unbridled aggression of Stalin’s Soviet Union which helped the new German state to come in from the cold and back within the international fold. Wartime hostilities against Nazis were dissolved in the spirit of realpolitik – “my enemy’s enemy is my friend”. The Americans sought to mobilise West German military manpower against the Soviet threat. It was the Americans who made the running in reintegrating German military power into European structures. 

    From now on German foreign policy will be less opaque and it’s power unmasked. 

    Before 1914 the major powers of Europe – Britain, Germany and France – were regarded as the world’s superpowers. After 1945, Europe lay in ruins. It was the USA (to the west) and the USSR (to the east) who were now the superpowers. Britain was forced to pull the plug on its empire. 

    French diplomat Jean Monnet deduced that, “The countries of Europe are not strong enough individually to be able to guarantee prosperity and social development for their peoples.

    “The States of Europe must therefore form a federation or a European entity that would make them into a common economic unit.” 

    If the democracies of Europe were to remain at the globe’s top table, they would have to pool their resources collectively. 

    The Schuman Declaration on 9 May 1950 led to the formation, in 1952, of the European Coal and Steel Community (ECDC). The public message was that, by pooling coal and steel production, participating states were ensuring that they could never again go to war against one another. The reality is it was more an alliance of resurgent German economic power with French diplomatic power. 

    The Soviet Union

    West Germany was anchored in membership of the European Union and in NATO for economic and military reasons. Germany was happy to cede the strategic direction to others – the Americans and French. When the Berlin Wall fell the prospect of German reunification triggered a variety of responses. The USA was in favour of reunification and pushing back against Soviet influence. The Soviet Union was  preoccupied with attempts at internal reform and eager for financial support. Gorbachev told Kohl that he could not withdraw Soviet troops in East Germany as he had nowhere to house them. The German Chancellor agreed to finance and build homes for the Soviet troops, back in Russia. 


    It was Germany’s supposed EU allies – Britain and France – who had the greatest reservations about German reunification. Prime minister Margaret Thatcher’s opposition was thinly disguised. However, when French resistance dissipated she was left with no choice. British apprehensions about Germany’s new power within the European Union were focused on economic and monetary Union (EMU). Nicholas Ridley, Thatcher’s loyal cabinet colleague, after he described the proposed Economic and Monetary Union (EMU) as a “German racket.” He said that giving up sovereignty to the European Union was as bad as giving it up to Adolf Hitler. The quid pro-quo for French agreement to German unity was German support for an EMU. Germany would have to lose its much vaunted Deutsch Mark. From now on German financial heft would be masked by a common European currency. 

    “Russia got very rich selling cheap gas to Europe, and Germany got very rich selling expensive stuff produced with cheap gas. Current accounts swelled for both.”

    Zoltan Pozsar of Credit Suisse

    In the decade that followed reunification, Germany escaped its post-war ‘probation.’ It was free to choose its own priorities – these were primarily economic. Helmut Kohl focussed on the market integration of former East Germany. His successor, Gerhard Schrӧder, focussed on labour market reforms to boost German competitiveness.

    In foreign policy, Germany was happy to delegate to the EU and NATO. When it did assert itself – for example, by pushing hard in 1991 for the early recognition of the independence of Slovenia and Croatia, leading to the Yugoslav wars – it did not always produce good results. Germany avoided large and costly military spending and the problems associated with it. That was the policy practiced by Angela Merkel. Her personal low-ego approach matched the national low-ambition foreign policy which assumed that all major geopolitical questions had been settled, that ‘the West’ had won, and that Germany could be friends and trade with everyone. Burdened by history Germany got to enjoy “the end of history” as the US political scientist Francis Fukuyama heralded the end of the Cold War.  

    End of Ostpolitik ? 

    Germany was content to shelter for free under the American umbrella. The German defence forces, which had been highly rated before 1991, were allowed to decay. German foreign policy focussed less on geopolitical matters and more on the European Union. After 1991, Germany emphasised economic success. In the words of Zoltan Pozsar of Credit Suisse, “Russia got very rich selling cheap gas to Europe, and Germany got very rich selling expensive stuff produced with cheap gas. Current accounts swelled for both.” Nord Stream was so good for Germany and Russia they agreed to a second pipeline. This business opportunity ended abruptly on February 24 of this year when Vladimir Putin invaded the Ukraine. 

    The Russian miscalculation with regard to Ukraine was that it placed Germany in a very difficult position. German dependence on Russian oil and gas was now pitted against western moral outrage at a flagrant breach of international law. Putin underestimated the extent of international outrage and the pressure for Germany to fall into line. 

    Since the days of Bismarck, Germany has generally pursued a policy of friendship with Russia so that – with its back secured – it could pursue its ambitions in the west. But Kaiser Wilhelm II abandoned it, with disastrous consequences in 1914. In 1922, the Treaty of Rapello saw the shunned Weimer Republic steal a march on the rest of the diplomatic world when it cut a deal to open friendly diplomatic relations with the reviled Bolshevik government. In August 1939, von Ribbentrop travelled to Moscow to secure the benign neutrality of the USSR as Germany planned a war of aggression on Poland. Given their size and geographic closeness, it has always made absolute sense that Germany and Russia should pursue friendly diplomatic and trade relations. But, as long as Europe was divided, Germany was on probation and its foreign policy was shaped in Washington DC, that logic could not assert itself. However, post German reunification, it could. For many years, trade flourished.

    Germany looked on with concern as Russia stumbled from being a chaotic democracy to being a murderous autocratic kleptocracy. The imperatives of improving the material position of its citizens and eschewing its past imperial aggressiveness meant that Germany looked on anxiously but said little as Chechnya was destroyed, as Georgia was attacked and as Crimea was annexed.

    The brazenness of Russia’s invasion of Ukraine has recalled the bad old days of the Cold War. It has brutally exposed the frailties of Germany’s softly-soft policy. It has also led to sharp criticism from Poland and the Baltic states – countries that have deeper and even more bitter experiences of dealing with the Russians. Germany has therefore supported western sanctions against Russia. It has cancelled  Nordstream 2. But Germany has not been at the front of the queue to confront Russia, rather, it’s been at the back. Like a defective shopping trolley with a mind of its own, German foreign policy still lurches instinctively towards rapprochement with Russia. There is no doubt that there is an absolute logic that an energy rich country like Russia should supply gas to a heavy consumption market in Europe, but there is no logic in Europe allowing itself to be blackmailed again over gas supplies in the future. Germany had to endure a long period of probation after 1945 before it was fully accepted into the club of civilised countries with whom one associates and trades freely. The door to that club is now firmly shut to Russia. In June, the German chancellor Olaf Scholz told the Bundestag that, “Partnership . . . with Putin’s aggressive, imperialist Russia is inconceivable for the foreseeable future.” Even if Putin was replaced, the west would be very reluctant to make itself overly dependent on Russian energy supplies in the future. Once bitten, twice shy. 

    If there is trust, trade works; if there is no trust, everything is up for grabs. Expectations have turned negative. Germany would prefer they had not. Germany must discard wishful thinking and confront the changed reality. An increasing trade boycott with Russia is the first and most obvious result. A sharp increase in military spending and capacity is the second result. Shortly after Russia’s invasion of Ukraine, Olaf Scholz announced that “We [Germany] will have to invest more in the security of our country to protect our freedom and democracy.” The country plans to sharply increase its spending on defence to more than 2 per cent (up from 1.5 per cent) of its annual economic output. Scholz said his government planned to supply 100 billion euros for military investments from its 2022 budget, up from  47 billion euros the previous year. A pausing and possible scaling back of Germany’s economic interdependence with China is the third result. In September Germany’s economy minister, Robert Habeck, said his government was working on a new trade policy with China to reduce dependence on Chinese raw materials, batteries and semiconductors, promising “no more naivety” in trade dealings with Beijing.

    Germany’s preferred post-reunification strategy of running down its defences and trading with everyone emphasised the material goals of its ‘nie wieder’ strategy. But with Russia’s aggression and China’s newfound military assertiveness, Fukuyama’s end of history maxim has abruptly ended. Germany is now confronted by a Zeitenwende – change of an era. 

    This will cost Germany a cold and costly winter, truncated export markets, an expensive transformation of its energy infrastructure and significantly greater military spending. From now on German foreign policy will be less opaque and it’s power unmasked. 

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