War And Cheese

By Teeuwe Mevissen, Senior Macro Strategist at Rabobank

In the beginning of this millennium, when the US made the ill-fated decision to invade Iraq – based on flawed assumptions that Iraq would be in the possession of weapons of mass destruction – then secretary of defense, the late Donald Rumsfeld, called Western Europe “the old Europe”. The remark clearly touched a nerve in the Berlin and Paris capitals. But for the wrong reasons, Donald Rumsfeld was – and unfortunately still would be, right. Western Europe still is old Europe and maybe has become increasingly so, i.e., an even older Europe.

With progressive liberalism deeply engraved in the hearts and minds of the current political elites and those of the past decades in Western Europe, Europe finds itself in a place of dependency in many areas. Security, technology, raw materials and energy are just a few of these areas where any geopolitical actor that would be slightly serious in its strive for strategic autonomy, would want to be (largely) independent. But the previous German/French axis failed miserably in addressing these dependencies and actually raised them. Additionally, both countries (as did Brussels) failed in forming a coherent and future-proof European strategy to position itself in the modern era. A modern era, which, as we predicted already years ago, would be characterized as fragmented and disorderly. Realists would immediately point to the core realist concept of “anarchy”, which is surely the better way to describe the current world order than “rules-based” does. In the anarchic picture that realists hold regarding the international system, there is only one rule. And that is that you simply cannot have enough power.

While France was dreaming about a European leadership role in its pursuit of strategic autonomy, Germany was doubling down and continued fighting an already lost battle in trying to uphold the international rule based order. Both aspirations or maybe better described as dreams, were nothing but illusions. But still it very much seems that old Europe thinks that it still has the strategic autonomy to choose between war and (selling) cheese. It makes one wonder how long it will take old Europe to fully realize that the global picture has changed and that it is not the time to say cheese anymore but to show its teeth instead. But maybe we are seeing some kind of start with that since multiple probes have been launched now by the EU regarding China.

At the same time the German car lobby unsurprisingly expressed its strong opposition to the recent probe into China’s EV sector; illustrating the complex political landscape that is still heavily influenced by short term business interests i.e. shareholder value. Indeed this might be one of the more important factors why financial markets are generally only mildly and very often just shortly influenced by geopolitical tensions. Business simply prefers business as usual and businesses often get their way. The many Western companies that (would) still love to continue to engage in business as usual practices in Russia are illustrative of this fact. It is however up to our elected governments – the governing class – to counter these forces of the ruling class in order to protect the legitimate interests of the middle/working class; which by the way is where both neo- and progressive liberalism failed. But it is unlikely that financial markets will continue to show a relatively high degree of indifference to the new world disorder that is increasingly unfolding right in front of our eyes. For instance the risk of higher energy prices for longer has become even more significant because of the current war in Israel.

And now Europe is faced with yet another conflict in its periphery. While this is guaranteed to negatively impact Europe from the outside, the war also increases tensions within old European states where pro- and anti Israelian protesters are reflecting just one of the many divisionary lines that currently plague the societies of old Europe. As if there aren’t already more than enough security issues that the EU has to deal with. Now those who think that old Europe has embarked on a ‘Zeitenwende’ – as current Bundeskanzler Scholtz so proudly proclaimed just after the war between Russia and Ukraine broke out – will turn out disappointed. The industrial defense base in old Europe has not received close the amount of orders it needs to be able to be able to safely invest in higher capacity in order to significantly increase much needed defence production. As such, old Europe continues to neglect the core task of any government being to ensure – and if necessary enforce – the protection of its citizens.

While we just made the point that it seems unlikely that markets will be able to neglect the current geopolitical realities, this is still exactly what we witnessed only yesterday. News that China finally seems to be ready to come up with sizable stimulus and dovish comments coming from the Fed was enough to fuel global markets with the necessary amount of optimism. Yesterday’s risk on sentiment even resulted in a temporary rise of Eurodollar above 1.06. Furthermore, US yields dropped sharply while stocks went up.

Today we see a similar picture showing that “the markets of course have no heart” as our well respected colleague Jane Foley put it today on Bloomberg’s Surveillance. Stocks rise further on the same news that resulted in similar moves yesterday: Chinese stimulus and Fed dovishness. It will clearly depend on the situation in the Middle-East whether this optimism will prove to be sustainable. As for now, Israel’s finger is not pointing straight to Iran yet but in case direct involvement from Iran would be proven, it is hard to see how Israel would not retaliate in some way. This would obviously mean a significant escalation of the conflict.