Weapons Decide Who Survives
By Michael Every of Rabobank
After NATO held an Article IV discussion about Russia’s airspace violations, and President Trump and Poland said they should/would shoot things down, a Spanish military jet with a government minister onboard suffered GPS disruption near Russia’s Kaliningrad and Denmark’s Aalborg airport was closed due to suspicious drones. Somebody doesn’t take NATO seriously -- the number of operational fighter jets it has ready in Europe isn’t serious in a good way -- or somebody else is stirring the pot. Either way, tensions remain extremely high.
Indeed, while Trump claimed he was the victim of a “triple sabotage” at the UN, and is demanding an investigation, President Zelenskyy gave a speech at the General Assembly which was more Trumpian than the one with the faulty escalator and teleprompter. It matters more than any “because markets” bullets:
“Today, no one but ourselves can guarantee security. Only strong alliances. Only strong partners. And only our own weapons. The 21st century isn’t much different from the past. If a nation wants peace, it still has to work on weapons. It’s sick – but that’s the reality. Not international law, not cooperation – weapons decide who survives. You know perfectly well – international law doesn’t work fully unless you have powerful friends who are truly willing to stand up for it. And even that doesn’t work without weapons. It’s terrible, but without it, things would be even worse. There are no security guarantees except friends and weapons…. Even being part of a long-standing military alliance doesn’t automatically mean you’re safe.
This is all about collapse of international law and the weakness of the international institutions. And so, it’s about the rise of weapons. Weapons decide who survives… We told you before – Ukraine is only the first.”
The implications for Europe in particular should be crystal clear, and even those who look at markets, not geopolitics, should be able to grasp it implies vast changes in the political economy, the fiscal position, and the functioning of major institutions. Even if you don’t think so, it’s still safe to assume EU decisionmakers -- some of whom now feel under personal threat -- do.
As Zelenskyy spoke, all was in flux globally:
Trump promised Arab leaders he won’t let Israel annex the West Bank, and his Gaza peace plan gained support from them;
South Korea’s President unveiled a ‘realistic’ peace plan, but it remains unclear if North Korea will reciprocate;
the South China Morning Post suspects Trump’s “Russia rant at the UN” may open a door to détente with Beijing; and...
Australia’s PM told the UN middle powers could band together to bring stability during “world chaos” – though as Zelenskyy pointed out, those with no military power can’t stay “in the middle” geopolitically.
Relatedly, as an FT op-ed today note, ‘Europe’s necessary appeasement of Donald Trump’ because “Surrendering on trade is worth it to keep America engaged in the continent’s security”. That’s an argument we made repeatedly before the US-EU trade deal was signed, even as many in Europe argued it was unfair, a humiliation, or not a real FTA and hence had no validity. Regardless, Europe is paying. The quid pro quo is the US will sell it the weapons to help Ukraine regain its lost territory: which requires vastly more, and more expensive, systems --and manpower-- than holding a defensive line. Will Europe balk when it sees what the cost really is and then push for a deal, or will it step up to that much larger, riskier plate?
Action in markets was also all about geoeconomics:
There was more talk of ouroboros circular investment in AI. As Zelenskyy also underlined, AI is now at the heart of our current global arms race: no, Mr Market, it’s not about helping you write e-mails faster.
Diesel traders are betting on price spike as Russian refineries are attacked by Ukrainian drones, says Bloomberg.
Argentina temporarily suspended exports taxes on key agri exports to boost sales and raise dollars, as the US Treasury prepares a $20bn swapline for it, the carrot in the Monroe Doctrine this time, not the stick of sanctions on Brazilian judges and their family, or blowing up Venezuelan boats carrying narcotics
Taiwan blocked semiconductor sales to South Africa for actions which “undermines our national and public security”, as Johannesburg has been pressuring it to relocate its embassy. Reportedly, Taipei could consider adding other countries to its blacklist ahead.
In the US, South Korea said its ongoing US FDI projects --which may need a Fed swapline to fund in full-- will remain in limbo until there is a fix to the visa situation that saw executives manacled and deported.
In the UK, the government is looking at buying up Jaguar Land Rover parts to protect jobs at its suppliers; and
The Hong Kong press muses a rumored White House $5bn rare earths fund won’t loosen China’s grip on that key sector, as the first firm involved in such a Pentagon contract underlines it only happened because of its vertical upstream-downstream structure. Which logically says expect more of that, with the Department of War at the end of the pipeline, not a US “because markets” retreat into accepting China’s anything but “because markets” rare earth monopoly.
In the economy, today’s headlines also show geopolitical tensions will rise as domestic political pressures to ‘do something!’ increase: in the UK, ‘The squeezed middle class who can no longer afford to see their friends’ (Telegraph); in China, ’‘Eating into old savings’: can the 15th 5-year plan be a panacea for spending woes?’ (SCMP); in the US, ‘White House to agencies: prepare mass firing plans for shutdown’ (Politico); and ‘Australia working on data centre strategy, but risks being left behind’ (AFR).
Meanwhile, in markets, the Bank of England has been urged by some climate economists to commission a review of monetary policy and to tolerate temporarily higher inflation, while governments should consider building up buffer stocks of staple foods.
Less controversially, expect that its debt pile is vast, the BOJ’s latest minutes hinted at a rate hike in October.
At the same time, ‘Europe’s Security Demands a Lot More Securities’, says Bloomberg, which, in typical fashion, is trying to inject “because markets” into a geopolitical environment in which they are no longer in charge anymore.
Only weapons are.
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