Category Archives: Britain

Britain, Defence, Europe, Military, NATO, United States

Without the US, can NATO survive?

NATO ALLIANCE

Intro: If Trump follows through on his threat to pull out of the alliance, the West will face its most profound crisis in 80 years

For eight decades, NATO has weathered internal disputes, enemy plots, and shooting wars in Bosnia, Kosovo and Afghanistan. America’s departure of this historic alliance would be the biggest divorce in history.

If Donald Trump acts on his threat to finally pull the US out of NATO – having said publicly that he is “strongly considering pulling out” after allies failed to join his war on Iran – the transatlantic family will be torn asunder.

At which point, the club that calls itself the most successful alliance in history may as well close its doors.

And the pain could match that of the most acrimonious of break-ups.

The numbers are stark enough: the United States alone accounts for more than 60 per cent of NATO’s total defence spending and provides the bulk of the alliance’s firepower, particularly at sea, in the air, and in nuclear deterrence.

The US has 1.3 million active military personnel – a full million more than Turkey, the next largest NATO force.

The United States is, however, not simply the largest and richest member of the club. It is the linchpin, the tent pole around which the entire edifice has been constructed.

It has logistical capacities in airlift and shipping, as well as satellite and signals intelligence, that other NATO allies rely on to get them into battle and help them fight. And it has always provided the leadership that has kept the alliance together.

Europe

The most profound threat would be for European members, the primary beneficiaries of the Article 5 promise that “an armed attack against one or more of them in Europe or North America shall be considered an attack against them all”.

For the first time in 80 years, they would have to face Russia shorn of that basic security guarantee, even as war rages on the continent.

Trump allows other NATO countries to requisition US kit for Ukraine via a programme called The Prioritised Ukraine Requirements List, but has curtailed direct US military aid to Kyiv.

Nonetheless, Moscow has not doubted the seriousness of the NATO alliance. For four years, it has avoided risking a direct confrontation with NATO powers, to the point of refusing (for the most part) to bomb the airbases and railway depots in Poland that supply Ukraine.

But remove American conventional and nuclear power from the equation, and the risks of doing so suddenly look much more palatable. Vladimir Putin has long made the destruction of NATO and creation what he calls a “new European security architecture” one of his dearest and cherished ambitions.  

That does not make a direct Russian attack on Europe inevitable, should the US abandon the alliance. But the chances of Putin taking a gamble would increase substantially.

Greenland and Canada

Quitting the alliance would not only absolve Trump of the obligation to come to allies’ defence. It also opens the way – at least in theory – to one would-be former ally attacking another, a scenario NATO itself would never have been able to survive.

Canada, in particular, would face difficult new realities. Trump, who has ordered attacks across 13 countries since he returned to the White House, has coveted their country (a NATO founding member) as a future “51st state”. Suddenly uncoupled from its enormous neighbour and security partner, Ottawa would no longer live with the certainty that North America is a safe and secure home.

War is perhaps most likely in Greenland. In recent weeks, it emerged that the Danish military had secretly prepared to repel a possible American assault on the island amid repeated threats from Trump to annex it.

Troops were equipped and ordered to blow up key runways and even flew in blood bags to simulate treating the wounded from the anticipated battle.

These nightmarish prospects present serious dilemmas for Canada and Denmark’s remaining allies.

Would Britain, France, and Germany send troops and ships to fight off an American invasion? Or out of dependence on and fear of American might, would they turn their backs? Leaders in Britain will be praying that they never have to make such a choice.

Everything from Britain’s nuclear missiles, which must be serviced at American facilities, to GCHQ’s signals intelligence network, which overlaps with the US National Security Agency, is enmeshed in the apparatus of the US security system.

America

Like any major break up, the pain would not be one way. America, too, would suffer.

Since its founding, NATO has allowed the US to project power globally. US airbases in Britian and Germany, for example, are currently being used for American operations against Iran.

NATO states also house and accommodate American early warning systems. It is the UK and Norway, for example, whom the United States relies on to keep an eye on Russia’s nuclear missile submarines operating out of Kola Peninsula and the Barents Sea. And while some NATO members – France, Spain, and Italy – may have baulked at the war with Iran, the alliance has proved vital in other US-led engagements.

Its member states joined the Americans in ending the Serbian genocide in Kosovo in 1999, for example, and in the 20-year campaign in Afghanistan. Many also showed up for both the first and second Gulf Wars.

If the United States does find itself embroiled in the much feared and potentially epochal war with China in the Pacific, such former allies will be missed.

The consequences

For these reasons, and the fact that Trump cannot withdraw from NATO without approval of a two-thirds Senate majority or an act of Congress, it is possible the worst fears about transatlantic relations may not come to pass. Indeed, even in a future without the formal North Atlantic alliance, American will need allies and to maintain bilateral ties.

And since Trump’s public doubts about NATO and his threats against Greenland have already undermined the deterrent power of Article 5, perhaps losing it altogether would not do much more damage.

Conventional defence spending in Europe is already rapidly increasing, especially in the east and north of the continent. No sensible Russian general is likely to believe a fight with Poland would be a walk in the park.

Although small compared with America’s, Britain’s nuclear arsenal, which, unlike the French one, is committed to the defence of NATO, is potent enough to act as a serious deterrent. The UK would, however, have to develop a domestic delivery system if it is to eventually wean itself off dependence on US Trident missiles.

There is also the suggestion that the alliance could continue in some form, even shorn of the US. Trump’s repeated attacks on the alliance have already prompted some British and European strategists to think about how to preserve it without America.

The remaining allies could, for example, retain the North Atlantic Council, NATO’s main decision-making body, and the mutual defence clause.

Perhaps, then, there is a very narrow but plausible path to enduring a divorce and not suffering too greatly.

But should Trump or another incumbent president come to see Canada and Europe as enemies, the world will change profoundly.

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Britain, Economic, Government, Politics

The Government must allow markets to do their job

ECONOMIC

Intro: Fallout from the Iran war and the energy crisis that has followed is the ultimate test of the UK Government’s economic acumen

A famous story which used to be known by every schoolchild in the land, King Canute famously sat on his throne at the edge of sea during the early 11th century, and ordered the tide to stop coming in.

Needless to say, the tide did not obey. Some modern interpretations suggest that he wasn’t crazy or mad but was rather trying to demonstrate to his courtiers the limits of regal power. Even the King could not stop the tide.

Governments today need to recognise what little power they have in relation to the current energy crisis.

Although there isn’t a lot they can do, unlike King Canute and the tide governments are not completely powerless. But first comes the need for understanding. The energy crisis is a supply shock which changes the terms of trade, acting as a sort of tax that transfers money from net energy-consuming countries to net energy-producing ones. We are a net energy consumer. This crisis, then, makes us worse off, whatever we do.

And there are two major knock-on effects. First, the economy can be sent into recession as people react to the loss of income by spending less. Second, this “tax” takes the form of a rise in the price of energy that delivers an initial upward spike to the general price level, thereby increasing inflation in the short term, and carrying the danger of embedding higher inflation.

Although there is nothing that governments can do to stop the loss of net national income, there are things they can do to try to mitigate these two knock-on effects.

There could be a case for loosening fiscal policy to reduce the hit to consumer incomes and consumer spending and hence aggregate demand. The parlous state of the public finances, however, means that the scope to do that now is restricted. One way they could seek to limit both the hit to real incomes and the upward pressure on the price level is through granting subsidies and imposing caps on prices.

But this isn’t a free lunch because, unless the Government can justifiably and safely borrow more, which it really can’t at the moment, such things have to be paid for by the taxpayer. It is a case of robbing Peter to pay Paul or, most of the time, robbing Peter to pay Peter.

This is actually still the case if the money for such subsidies is found by more borrowing rather than through new tax rises. This simply defers when Peter and Paul have to cough up.

Most importantly, the Government needs to let market forces do their job. The increase in energy prices acts as a signal to consumers to minimise their use of energy and simultaneously sends a signal to producers to boost the output of energy.

If the help to consumers takes the form of artificially keeping energy prices down, then the signal to economise on energy usage is smothered. More importantly, in our case the signal to producers is cancelled by the Government’s net zero policy, which is preventing the new extraction of North Sea oil and gas.

The best that governments can do in these circumstances is to manage the economy and their own finances most efficiently. Of course, they should have been doing this anyway, but in these difficult and turbulent times the importance of doing the right thing increases significantly. In the UK’s case, the fundamental error in the Government’s economic policy has been to preside over huge increases in government spending, while passing on a good deal of the burden to employers in the form of higher National Insurance payments.

One thing the Government could do to mitigate the consequences of the current energy crisis is to reverse this policy and bring in substantial cuts to government spending. This is not to tighten fiscal policy. Rather, the money saved should be redistributed to the economy.

The best use of it would be a reduction in employers’ NIC, which would reduce their costs and thereby lead to lower prices. It would also encourage firms to retain their workers.

This, too, would make a contribution to staving off the inflation danger. Over and above this, the principle responsibility lies with the Bank of England and its monetary policy.

History provides an illustration of how different responses to the same adverse shock can produce quite different results. In the 1973-74 oil crisis, all the oil-consuming countries of the West – including the UK – suffered an adverse terms of trade shock. They were all made worse off.

But different countries responded differently to the spike in the general price level. In the UK, inflation peaked t almost 25pc. In Germany, by contrast, inflation peaked at just under 8pc.

It has become clear that this UK Labour Government doesn’t really understand or believe in markets. You can see this everywhere, from the wish to control rents in the belief that this will somehow make tenants better off to the recent blaming of price rises on retailers.

This Government cannot avoid the adverse economic shock that higher energy prices imply but it can limit its consequences by letting markets perform their function.

It should abandon at once the headlong pursuit of net zero and allow new production from the North Sea, while cutting government spending and reducing business costs.

We should understand the political forces standing against such action; it is unlikely that the Government will do anything like this. But that doesn’t mean that there is not an alternative course of action available, if only the Government had the insight and the courage to pursue it.

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Britain, Digital Economy, Financial Markets, Society, Technology, United States

A digital payments system is undermined by cryptos crash

DIGITAL CURRENCIES

Intro: Digital payments systems are taking hold in China and America, and the eurozone is chasing hard to set one up. The Bank of England’s lack of enthusiasm for a digital pound is a blessing in disguise

China already has one, and envious of the near monopoly American companies enjoy in European digital payments systems, the eurozone is chasing hard in setting one up.

Trump’s America has made it illegal for the Federal Reserve to pursue such a project, and instead has set its sights on privately sponsored stablecoins.

We’re talking here about so-called central bank digital currencies (CBDC) – in effect, digital versions of physical cash.

On this issue, the UK and the Bank of England stand pretty much nowhere. It might surprise you to learn that’s faintly reassuring. Digital money is not an issue to set the pulse racing, but what is amazing is how people are so exercised by it.

A Bank of England consultation on proposals for a digital pound provoked an unprecedented tidal wave of more than 50,000 responses, overwhelmingly negative in nature.

It wasn’t just issues over privacy posed by a digital currency that many respondents seemed to be upset about. Nor was it the complex and costly logistical problems in providing universal access to central bank money.

Still less was it the threat that a digital pound would pose to the future of fractional reserve banking.

Rather, it was the creeping encroachment on physical cash that people feared most.

Plain and simple, people still like the idea of notes and coins, even if they hardly ever use them.

No decision has yet formally been taken on whether to establish a digital pound, but the sense is that any appetite the Bank of England might once have had for such an enterprise has all but disappeared.

Nor does the Bank appear to be that eager on the supposed alternative of sterling-based stablecoins. Its proposed framework for regulating stablecoins has gone down in the industry like a lead balloon, and although the Bank has rowed back on some of the regime’s more costly features, is still widely thought of as too demanding to allow for the creation of a significant stablecoin presence.

George Osborne, a former UK chancellor, has claimed that Britain is in danger of being left behind in a payments revolution which is taking the rest of the world by storm.

But then, he would say that, wouldn’t he? Among a seemingly ever-widening portfolio of positions enjoyed by Osborne, he is an adviser to the US-based crypto exchange, Coinbase, which has a powerful vested interest in as lightly a regulated stablecoin environment as possible. Since Osborne went public with his concerns, Bitcoin and much of the crypto universe has crashed, and many so-called stablecoins – theoretically backed by the real-world, ultra safe, fiat currency assets – have faltered too.

At least half a dozen of them have “broken the buck”, or lost their dollar peg. Some have fallen to as low as a few cents in the dollar, resulting in losses running to hundreds of millions of dollars.

There’s plenty more damage still to come from that sell-off, so if the Bank of England has been asleep at the wheel in failing wholly to embrace the ecosystem of decentralised finance, we may have much to thank it for.

Instead, the Bank has focused its attention on its plain vanilla business of updating its systems for making direct, account-to-account payments between buyers and sellers.

It’s a kind of muddling through alternative to the European Central Bank’s (ECB) empire-building on the one hand, and Trump’s enthusiastic embrace of crypto on the other.

This should not be read as a derogatory view, but the Bank of England regards payments as a simple utility, not as either a way of maintaining the Central Bank’s grip on the “moneyverse”, which seems to be the ECB approach, or as a fintech opportunity for money-making, which is the current White House approach.

Critics complain that the Bank is further condemning the pound – and indeed the City – to the slow lane. Others would say that its safety-first approach is actually what you want out of a digital payments system.

Certainly, it needs to be faster, even instantaneous if possible, and to cost as little as possible. Above all, though, you want it to be robust, so that it acts as a wholly reliable means of exchange.

Four years ago, the House of Lords economic affairs committee concluded after a lengthy inquiry that a digital pound managed by the Bank of England was “a solution in search of a problem”.

Nothing has happened since then to change that verdict.

The vast majority of sterling transactions are already digital in nature, in any case, but they take place between commercial banks or on card networks, not via the central bank.

The benefits of a central bank digital currency are far from obvious, yet there are clear cut risks to financial stability, privacy, credit provision and security, to name just some of them.

Why then is the European Central Bank fixated on establishing a digital euro? In the main, it’s about monetary sovereignty and parallel fears of US dominance.

All the main card networks are American-owned, while existing systems for direct bank-to-bank settlement in retail transactions are clunky and inefficient in many euro-dominated countries.

And it’s about the threat posed by dollar-denominated stablecoins as an alternative means of payment.

The ECB and its political masters do not want this particular Trojan horse at the centre of the eurozone payments system.

Indeed, Scott Bessent, the US treasury secretary, has openly admitted that part of the purpose of the Genius Act, which sets out a regulatory framework for stablecoins, is to attract money into US treasuries, thereby underpinning dollar hegemony in international markets. Financing the US treasuries market is not what Frankfurt has in mind when thinking about the future of money.

Instead, the digital euro is proposed as part of Europe’s wider, statist approach to “strategic autonomy”, or making the continent less dependent on rival jurisdictions for core industrial, agricultural, and monetary functions.

The idea that money can in some way be reinvented is what really lies behind developments such as CBDCs and stablecoins.

So here’s the truth: it cannot. The Bank of England is no doubt guilty of many failings, but it does at least properly understand this basic maxim. Its overarching responsibility is to ensure that a pound is worth a pound, no more, no less.

Like cryptocurrencies, stablecoins are at root just another mechanism for rent extraction. And as long as there is scope for improving existing pubic infrastructure for digital payments, which is where the Bank of England is focusing its efforts, it is also hard to see the point of digital cash.

Paul Volcker, a one-time chairman of the Fed, had it about right when he said that the only socially useful innovation to come out of finance in the past several decades was the ATM.

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