In early February 2022 in “Anatomy of a Crisis”, our major analysis ahead of Putin’s offensive against Ukraine examining how it could be possible that we were facing the biggest military conflict in Europe since 1945, Jupiter Merlin Investment Director Alastair Irvine wrote, “Germany and France are a menace; just not to the Russians”.

This past couple of weeks have witnessed strategic policy dividing lines open among the Western democracies. While both France and Germany are providing assistance to Ukraine to a degree, we have had cause on several occasions since the invasion to observe the extent to which both President Emmanuel Macron and Chancellor Olaf Scholtz have radiated mixed and unhelpful messages and remained out of alignment with key NATO allies as the conflict has progressed.
Divisions run deep
But it’s not just about Russia. There are deeper elements at work in Europe of which Germany and France’s approach to Russia is merely a symptom. Essentially they break down in to three components: the pointlessness of the EU and its resulting insecurity verging on paranoia, particularly in relation to the US, but also its relationships with both Russia and China; German domestic politics and Scholtz’s own position of weakness; and, finally, the fundamental character flaws in the person that is Macron.
The EU: neither beast nor fowl, a lost soul in search of a place in the world
We have discussed often in these columns that the European Union is a barely half-finished political project: it is a wobbly, top-heavy construct with insecure, narrow foundations. Its inception in 1951 was entirely clear and simple: in the aftermath of the disasters of two world wars, formulated as the European Coal and Steel Community comprising Germany, France, Belgium, Holland, Luxembourg and Italy, it was designed to bind these countries together by treaty so that none (i.e. Germany and Italy) could ever again wage war on their neighbours. Slow forward seven decades and today the European Union, the ECSC’s linear descendent, is a Frankenstein-like product: bits and bobs bolted together pretending to be a homogenous whole. 27 disparate countries spanning the continent in a single market and customs union bound by a shared Napoleonic legal system with a supranational court, within which 19 countries are more closely bound by a unitary currency and their own central bank. It has no fiscal union and no political union. It finds itself in limbo, stuck between being far beyond a simple free-trade area and yet not being a unified national entity, despite clothing itself or being conferred with some of the trappings of the nation state (e.g. embassies and ambassadors; its own seat at the G7/G20). Politically, it cannot go back; equally, it has no idea of how to go forwards to where the centrists would like it to be (and having come this far, logically what it ought to evolve into): a single identifiable, unified nation state with its own written constitution and fully functioning centralised government and institutions.

Nevertheless, even if others struggle to, it sees itself as the third of today’s Great Powers, alongside the United States and China. Only it isn’t. And it is not, precisely because it is a heterogenous hotchpotch; despite fielding two presidents (for the Commission and the Council of Ministers respectively, which in itself speaks volumes), it finds itself in the position where individual national leaders of member states can circumnavigate Brussels and pursue their own foreign policy interests and agendas (though they may not unilaterally enjoy their own trade agreements with non-EU countries).

It is this fundamental insecurity and lack of direction which leaves the EU as a lost soul in search of a purpose. But even when it occasionally finds one of its own on the world stage (e.g. the Iranian Nuclear Containment Treaty in which the EU as an entity was a co-signatory), or has one thrust in its direction in which it should be an active and obvious participant in finding a solution (e.g. the 1990s Balkans War; the current conflict in Ukraine), it proves either relatively or wholly useless: too many competing and incoherent voices combined with sclerotic and catastrophically slow decision-making all too often rendering it irrelevant.
Before opening mouth, best to engage brain
All of which notwithstanding, and shared with France and Germany, the EU continues to try to assert its authority as an influential power. But in doing so, as a point of differentiation it is determined to unshackle itself from the US (in Macron’s inflammatory phraseology, to demonstrate that the EU is “not a vassal” of America). That it should want to differentiate itself is not unreasonable (even if it is unhelpful). But where it gets in to trouble is how it goes about that. When forging its own path, the language of differentiation often actively undermines its allies, particularly the US.
NATO, America and the “vassal” conundrum
Here the EU and Macron in particular have form. The United States accounts for 72% of all NATO’s defence spending. The reality is that in terms of military capability it contributes virtually all the effective, heavy firepower, including nuclear capability (France and the non-EU UK are the only other nuclear-armed states in NATO). Even before Donald Trump’s Grand Remonstrance when he publicly berated delinquent EU member states on their failure to meet the minimum 2% of each country’s GDP to be spent on the defence of their own continent, the EU had been publicly harbouring notions of an integrated Euro army, navy and air force as one of the essential trappings of the nation state to go alongside being able to issue its own currency, dispatch its own ambassadors to foreign capitals, present a unified foreign policy etc. Leading that charge were President Macron and Ursula von der Leyen, the Commission President. While some of the rhetoric has toned down since Putin’s invasion, nevertheless the underlying sentiment for greater defence autonomy and breaking the US defence hegemon has not gone away. Without a common and firm commitment from all EU states to step up (and at its extreme, the cost of fully replacing the US military commitment to Europe would amount to trillions of euros and would take not just years but decades to complete), it is a strategy which is as dangerous as it is delusional. Alienating and disintermediating the US, the world’s most powerful military force and the cornerstone of western defence, plays straight into the hands of those would seek to do us harm.

France has always had an on/off relationship with NATO. In 1966, De Gaulle ordered all NATO headquarters out of France if they were not under direct French command, in response to which NATO removed all French commanders from all NATO responsibilities wherever they were located (it is a myth that France left the alliance: to whatever limited effect, technically France still remained a member thereafter). Having then been brought in from the cold, a new low was reached in November 2019. Despite all the very obviously mounting geopolitical tensions with China, Russia, Iran, North Korea, and the Alliance under pressure in Afghanistan from a resurgent Taliban, Macron chose that time publicly to declare NATO “brain dead”. He subsequently doubled down on his own unique brand of diplomacy: where munitions are manufactured under joint contracts encompassing EU and non-EU suppliers, Macron has delayed such arms being sent to Ukraine until a procurement structure is put in place which explicitly favours EU companies. Despite President Zelensky’s urgent need for artillery shells (and repeating Zelensky’s words to NATO in February in the “Panzer Poker” row about the supply of main battle tanks “you take your time, we’ll just carry on dying”), Macron is more interested in politicking than helping.
Macron the fixer?
It is true that that France is the only nuclear-armed country in the EU and also the only one with a seat on the UN Permanent Security Council. Whatever national influence that confers, nevertheless Macron somehow has it in mind that he himself is a great statesman, a fixer on the world stage. Compounding his delusion, a common theme running through his foreign policy is his confusion as to whom he believes himself to be representing. Certainly France, that goes without saying. But France is not synonymous with NATO. Nor with the EU. Naturally inclined to cut a deal with Putin to restore peace to Europe, the Franco/German/Italian axis within both alliances has very different ideas from most other allies about the desired outcome of the Ukrainian situation. That places them at odds with the UK and the US who want Putin defeated, and the eastern flank countries ranging from the Baltic to the Black Sea who, with the exception of Hungary, are strongly aligned with the Anglo Americans.

Macron’s recent visit to Beijing was another case in point. In making his “Europe is not a vassal of America” statement, Macron managed to imply that the EU (for which he had no authority to speak) should not be taking sides against China. Allowing the widely made interpretation that Europe has no viewpoint on China’s intentions to subjugate Taiwan, it was a diplomatic disaster. Further, his personally beseeching the Chinese to broker a peace deal between Russia and Ukraine cut no ice.

Having been rebuffed and made to look a fool by Putin a year ago, his current kow-tow (including a substantial French trade mission) to General Secretary Xi has been just as embarrassing. It will have allowed the Chinese to understand that as far as Europe is concerned, there is nothing to worry about. On the contrary, having also recently entertained Olaf Scholtz on a similarly doomed mission, the firm impression in Beijing will be that unlike the US and the UK, Europe is eager directly to coat-tail on China’s economic growth, and that both the EU and NATO are riven by deep strategic divisions.

Behind their thinly veiled diplomatic nonchalance, many of France’s NATO and EU allies were seething; even the Green Party German foreign minister Anna Baerbock (currently the German public’s top choice for Chancellor over her boss Scholtz) publicly refuted Macron’s stance on Taiwan on her own subsequent trip to Beijing, yet another European beating a genuflectory path to Xi’s door.

The dissent can only have added to the sense of satisfaction not only in Beijing but Moscow, Tehran and Pyongyang, all of whom are more closely aligned with each other than ever.
NATO and Ukraine’s prospective membership: a momentous change of view
But if Macron’s loose tongue has been counterproductive, at least NATO has performed a significant and very positive U-turn: last week, Director General Jens Stoltenberg told President Zelensky that Ukraine’s admission to the alliance will happen. At some stage. Last year Chancellor Scholtz gave an undertaking to Putin that he personally would veto Ukraine’s accession; less than three months ago, Zelensky was told that the chances of Ukraine joining NATO remained “vanishingly small”. It seemed increasingly bizarre and morally wrong that NATO was happy to commit arms, intelligence and training and yet not to entertain Ukraine as a formal ally, especially when Finland had just been adopted as a member, bringing with it a direct 830-mile border with Russia. Apparently, there is now unanimity in support for Ukraine to join. Common sense can prevail!
Escalation?
Conflict escalation remains a real threat. The Russians are actively eyeing up western energy and internet infrastructure assets as potential targets (viz the Russian oceanography ship described as a “trawler”, in reality a spy vessel festooned with a forest of communications aerials, cruising around the Baltic and the North Sea, scouting wind turbine and cable installations). Here in the UK the government’s intelligence agencies are actively warning businesses and institutions to prepare for increased malign cyber activity. Both indicate a heightened sense of awareness that Putin’s aggression might open up from a variety of new angles.

From an investment standpoint, geopolitics have taken something of a back seat for a while as investors focus on the economy. But they still rumble on in the background and it is worth keeping an open eye on events given their propensity to cause surprise in markets when they boil over.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

The value of active minds – independent thinking

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