Merlin Weekly Macro: Political avalanche hits Davos

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Awesome yet awful. Magnificent yet toe-curling. Rational yet unhinged. Rambling yet brutally blunt and to the point. Bombastic yet paranoid. Factual yet fantastical. Right but wrong. Some of the perversely opposing adjectives which spring to mind to describe the US president’s extraordinary address to the global great and good at the World Economic Forum. ‘Address’ is too inadequate a noun; his hour’s grandstand on the podium varied between a sermon, a diatribe, a lecture, a recital and a reprimand. It fired off accusations and humiliation alongside home truths, notably to the Europeans and Canada. It was liberally laced with menace, mimicry and vitriol; it was peppered with the occasional praise, the odd flash of wit and delivered with the supreme undisguised self-confidence of his own abilities and worth.

So extraordinary was it, one might have anticipated a stunned silence; not only did he receive applause but a standing ovation. Some will have greeted it with genuine admiration. The more cynical view is that it costs nothing to stand and applaud with insincerity in a dark auditorium; to remain sitting in protest, or as a challenge and a mark of disrespect could prove immensely expensive if the White House were to ever get hold of the guest list. As a freezing BBC Economic Editor Faisal Islam observed afterwards in a fog of cold breath, “We will look back and recognise that we’ve probably just watched a piece of history.” It is not history that most would care to see repeated.

The White House MOP targeted at NATO

The Donald landed in Davos knowing precisely that the Greenland bombshell he had exploded deep in NATO’s bunker last weekend with his threatened tariffs against Denmark and its supporters and the possibility of military invasion of that “big, beautiful piece of ice” unless he was granted control of it, would produce both a reaction and a result. He was not disappointed. He doubled down, even if he withdrew the threat of force as if he were doing everyone a favour. As it is, he is going to walk away with most of what he wanted: full, permanent sovereign control (“forever”) over chosen strategic locations on the island integral to America’s ‘Golden Dome’ homeland defence system, plus a whole string of mineral mining rights.

With Denmark and Greenland denied a seat at the table and learning of everything second-hand, the defusing deal was handed to him by NATO Secretary General Mark Rutte, who had no authority to do any such thing. If it comes to fruition, it will be spun as a victory for common sense and pragmatic compromise. In the unlikely event a deal is not concluded, the threatened tariffs and possibly military action will be back on the table; if any lesson has been learnt about the mercurial Donald Trump, it is never count anything out.

Wild West geostrategy

But whatever the spinners’ face-saving line, the reality is that a deal, even under duress, will be a defeat for both morality and principle: it was immoral for Trump to threaten military force and to hold an economic gun to his own allies’ heads. They folded long before the tariffs were due to be implemented (10% from 1^st February rising to 25% on 1^st June), Rutte and his associates bargaining away the fundamental principle of national sovereignty that is not theirs to offer.

In doing so, both parties have shaken the integrity of the defence coalition to its core. A mail-fisted, transactional Trump thinks he’s smart whereas in fact all he has done is to undermine the unity of western defence to the advantage of those who would do us, and America, harm. It is strategically illiterate.

Europe has been exposed as almost catastrophically weak; all the talk that Trump ‘blinked’ in the face of allied pressure because he backed down from his demand to own all of Greenland is a self-deluding, transparent fig-leaf over Europe’s and Canada’s nakedness. Europe buckled to preserve what little dignity and integrity the alliance still has. Trump moderated his demands and backed down on the use of force. According to insiders Trump’s apparent climb-downs were determined much more by the hostile reaction among a significant number of Republican Congressmen than from any macho posturing from Emmanuel Macron or technocrat talk from Mark Carney, or “Trump whispering” from Keir Starmer.

Starmer was conspicuously missing in action from Davos. His public position on the future of Greenland being purely a matter for Denmark and the Greenlanders to decide was clearly hypocritical. His own decision about the Chagos Islands and the potentially £37 billion the UK will pay to (pay, not receive from) Mauritius to take them from the UK against the express wishes of the Chagossians undermines this fundamental principle of self-determination. Starmer’s occupation of the moral high ground is tenuous. Further, Trump has done his homework at last and paid attention to and understood the substance of the Chagos deal which includes a new Mauritian lease on Diego Garcia to the UK which in turn is sub-let to the US (“who the hell defends a lease?”). The penny dropping that the deal brings the highly sensitive strategic island directly into the Chinese sphere of influence in the Indian Ocean, Trump has reversed his previous nodding endorsement and declared it “really stupid.” Who knew?

We might as well complete Starmer’s list of geostrategic and national security blunders: in the week that all the attention has been focused on keeping Chinese and Russian influence out of the Western Hemisphere by denying them access to remote and empty Greenland, Starmer has officially given permission for the new Chinese super-embassy by the Tower of London, hard by the City, the world’s second-largest financial centre, redacted rooms (i.e. intelligence gathering and potential for cyber interference) and all. It is a case of closing the attic window but welcoming them in through the front door. 

“We gave everything; we asked nothing; we got nothing back”

Throughout Trump’s monologue, striking was the inescapable sense of American victimhood, or at least the President’s sense of it on behalf of his fellow countrymen. Time after time he levelled the charge of ingratitude against Europe in the context of US expenditure on European defence over 80 years. Mark Carney too was personally in the firing line for ingratitude for the defence extended directly to Canada by dint of being America’s immediately adjacent northern neighbour. If Trump has his way, Canada will be the 51^st State of America.

 Memories may vary over the manner in which WW2 was won, an All-American affair according to Trump (“we won big”), without whom “you’d all be speaking German, possibly a little Japanese.” The only time NATO’s Article 5 has ever been invoked was by the US in the aftermath of 9/11. Its allies rallied to help, many to a great extent. It is also true that the reactions and enthusiasm of some were notional and nugatory. The irony is that little Denmark more than did its fair share in Afghanistan and proved highly effective relative to its size.

However, as ever with Trump, in among the hyperbole and the elasticity with the facts there is often more than a kernel of truth. The perception of European and Canadian governments free-loading on the back of America’s massive defence resources is widely held in the US, across the political spectrum. It is a charge that is substantiated by empirical evidence on defence spending and military capability and capacity. Many in America deplore Trump’s deeply corrosive tactics and his unashamed lack of diplomacy with its allies, but it would be a minority view that the US is not owed at least some respect for its endeavours on their behalf and the protection it has afforded over eight decades (in another context, despite being an official guarantor of Ukrainian sovereignty and security, we ourselves told President Zelensky to be grateful for our military aid to Ukraine: “We’re not an Amazon warehouse”).

Economic home truths

Few in the audience will have been able to disagree with Trump, particularly the UK and Europe, on the subject of the economy. The evidence is plain. He brutally exposed their own shortcomings with a long and exhaustive list of self-attributed Trumpian achievements at home including leaking the 4Q 2025 US GDP growth rate (“I probably shouldn’t say, but over 4%”) just to rub their noses in it when most have no growth worth speaking about of their own. He was clearly delighted at the extent to which the US trade deficit has narrowed thanks to tariffs and revealed a staggering $18 trillion dollar pipeline of foreign inward investment to revitalise and reindustrialise the nation (for the record, this number is deeply contested with no publicly available evidence to support it, but even half that number, almost three times the size of the UK economy, would be amazing). De-regulation, tax, the deep pool of US capital, the dollar, all are weaponised to American advantage (and in a zero-sum game defined by the limits of government debt and its affordability, the obverse of which is the disadvantage of others).

He characterises the world into winners and losers. Europe is a loser. He has a genuine affection for Europe and its culture (“my mother was 100% Scottish, my father 100% German: of course I like Europe”); on the other hand as a tribe he has an undisguised contempt for the majority of European leaders with the exception of Giorgia Meloni of Italy. He actually wants Europe to improve, if only to reduce the defence burden on the US taxpayer. The economic remedy is in their hands: a self-sustaining, expanding economy built around technological innovation, a vibrant private sector, based on secure and low-cost energy, with low taxation, limited state participation (“you can’t have a successful economy if all the jobs are federal”), and light regulation. It runs completely counter to the prevailing and almost all-pervading left-of-centre, Keynesian economic orthodoxy in Europe.

As the Americans say, “Go figure.”

Parting shot: the ghost of Spectre?

Trump’s division of the world into spheres of influence is a repudiation of globalism and encourages the notion of “might is right;” eschewing his legal responsibility as a guarantor of Ukrainian sovereignty and its 1994 borders, the manner of Trump’s peace negotiations in Ukraine, which will lead to its partition, is heading in the direction of legitimising bad behaviour by bad actors; his military interventions border on illegality. Applying strong-man tactics, Trump the perversely self-proclaimed “non-interventionist President of Peace” will dispense his own unique brand of pax humana wherever America sees the need; but the symbols, the traditional white doves, the olive branches, handshakes of peace and kumbaya, are redundant relics. They are replaced with high-tech hardware delivered in a mailed fist: MOPs, Tomahawk cruise missiles, nuclear-powered aircraft carriers, Navy SEALs and military Delta Force kidnap/hit squads.

No wonder Dmitry Medvedev, former Russian President/Prime Minister, hardline nationalist and Putin puppet, was moved to declare in the wake of the recent American intervention in Venezuela that henceforth nobody has the right to criticise his country for Russia undertaking what it regards as operations protecting its own national interests. Russian aggression has not only been implicitly vindicated but legitimised by Donald Trump. When talking about his Venezuelan venture in his speech at Davos, a joke throwaway line will have been seen as green light for every bad actor as legitimisation for illegal land-grabs and interventions to provide geostrategic advantage (e.g. Russia in Eastern Europe and China in the South China Sea): “maybe more countries should try it—make an attack and then do a deal.”

Trump left Davos having signed the Articles and convening his new international Board of Peace (subscription fee $1 billion, chairman Donald J Trump). Putin has been invited as a member. All it needed was for every member to be presented with a silver signet ring (which would cost three times as much today as six months ago) seal engraved with an octopus for the picture to be complete.

Extraordinary times. No wonder the gold price is rapidly approaching $5,000 an ounce. A year ago on Trump’s inauguration, it was $2,700. That doubling has little to do with the inflation outlook.

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