Behind the smoke and mirrors of German-American tensions:


Der amerikanische Botschafer Richard Grenell am 14. Januar 2019 bei Bundespräsident Frank-Walter Steinmeier

Germany’s dilemma is that its security is dependent upon the US while its economy increasingly is not.

  • In 2017, China was Germany’s principal trading partner for a second consecutive year. (Nienaber, Michael (2018). Reuters)

More so, the US is becoming increasingly less popular in Germany. Richard Grenell, US ambassador to Germany, seems to be spurred on by this very fact.

Some even refer to him as the ‘most undiplomatic diplomat in Berlin’.

Three issues strain the current German-American relationship:

  1. The Nord Stream 2 pipeline
  2. The nature of German-Iranian trade relations
  3. The development of 5G infrastructure by Huawei

Certain issues (such as the heightened energy dependence on Russia & the close relationship between Huawei and the Communist Party of China) rightly deserve attention.

However, what many people take issue with are:

  1. The blatant US foreign policy double standards
  2. Its dominion-esque top-down communication
  3. Its flagrant hypocrisy

Nord Stream 2:

The rationale against the pipeline-project is that Germany risks becoming too dependent upon Russian energy. In that line of thought, Germany would be exposed to Putin’s mood swings.

Yet unless Putin decides to go on a Kamikaze mission, it seems rather unlikely that Putin will decide to turn off the gas pipeline.

  • Russia has become ever more reliant on the cash generated by oil and gas exports, which account for 44% of all government revenues. (Butler, Nick (2019). Financial Times)

It’s safe to assume that Putin knows about the linkage between the energy cash-flows and the stability of his regime – especially whilst monitoring what’s happening in Venezuela.

Yet what’s really behind the smoke and mirrors?

As the EU’s demand for gas continues to rise, its own supplies begin to run out. The EU is now faced with a bifurcation.

  1. Increasingly rely on Russian natural gas
  2. Lean towards liquified natural gas (LNG)

The US is (surprisingly) the biggest producer of the latter, and now keen to become the biggest exporter, too.

However, shipping LNG across the Atlantic is expensive and the required terminals to unload LNG in Europe are not in place yet, which makes option 1 (see above) more attractive.

One might sense economic interests masked behind security concerns.

But would the US really …?

Never mind…

German-Iranian trade relations:

Speaking about US concerns of using one’s leverage in one domain to exert power in another (i.e. Russia’s energy geopolitics), let’s travel 3000km south-eastward towards Teheran.

  • Convinced of an existential threat from competitors, America is weaponizing the dollar to preserve its global economic and geopolitical position. (Das, Satyajit (2018). Bloomberg)

Foreign-policy and trade hawks in D.C. have discovered the power of the US’ global financial might (derived by the USD being the world’s reserve currency).

If that’s not enough, the US increasingly threatens traditionally close allies with secondary sanctions.

In this specific instance, the US intends to nudge Germany away from conducting business with Iran, and thereby providing funds to the ‘leading state sponsor of terror’.

Iran is by far not a saint. It supports militias in different places ranging from Lebanon to Syria. Its track-record on human rights issues is appalling.

Yet it is irritating to see how Iran is being demonised and bashed, while Saudi Arabia seems to get a blank cheque for close to anything (ignoring the fake US outcry about the Khashoggi murder).

US hawks, such as National Security Advisor John Bolton, openly advocate Iranian regime change for the sake of ‘liberating’ the Iranian society.

It seems like Mr. Bolton should attend a ‘History 101’ session on the Middle East. Wasn’t there a link between the overthrow of Mossadegh by the US in 1953 (‘Operation Ajax’) and the Iranian revolution in 1979 …?

Again, never mind.

At the same time, the US turns a blind eye on Saudi Arabia.

A country where women cannot leave their houses without their husband’s permission. A country where transgenders get tortured to death. A country where human-rights activists get locked up. A country that kills its own journalists abroad. A country that bombed Yemen, one of the poorest countries, to the brink of starvation.

While this doesn’t acquit Iran of any of its human-rights violations, it puts a lot of things about US foreign policy into perspective:

  • Power Politics & Interests > Morality

Something the public fortunately increasingly acknowledges:

Huawei’s 5G infrastructure:

Last but not least, let’s turn to the latest friction point between Germany and the US:

  • Huawei’s 5G infrastructure.

Last week, Mr. Grenell advised Peter Altmaier, Germany’s Minister of Economic Affairs, to cut ties with Huawei. If Germany were not to follow order, it would risk losing access to US intelligence.

An allied diplomat threatening a German minister.  So much for the state of the transatlantic alliance.

The US’ recommendation is rooted in the fear that Huawei’s infrastructure could become a Trojan horse for the CCP’s spying activities.

There has neither been proof for the US suspicions (1) nor for the technical feasibility of the accusations (2).

More so, it’s a rather bold move by the US to warn about the dangers of spying – merely six years after the NSA’s spying excesses in Germany have been uncovered.

In reality, leading US public officials have realised that the 21st Century great power struggle will be decided within the realm of technology – especially A.I. and 5G.

Losing to a competitor, that embodies to some an alternative model, would fundamentally question the appeal of the US’ model.

Yet it seems that some on Capitol Hill are afraid about the competition of systems.

Meanwhile Germany got an amuse-gueule of what it will feel like to be caught up in this century’s great-power struggle.


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The Fate of Pan-European Industrial Politics in the 21st Century


Last Wednesday Margarethe Vestager, European Commissioner for Competition, blocked the proposed Siemens-Alstom rail-merger. While Vestager’s rejection didn’t come as a surprise, it raises various interesting issues.

The rationale behind the prohibition of the fusion was the preservation of intra-european competition within the rail-mobility sector. This foreshadows the tale of an increasingly important trade-off EU competition lawyers will have to make: namely, the trade-off between European ambitions for the world stage and the preservation of healthy competition within Europe (e.g. Spain’s Talgo)

In Germany decisions by anti-trust authorities can be overruled by ministers (e.g. the Edeka-Tengelmann merger by Sigmar Gabriel in 2016). In instances like these, politicians are meant to balance ‚Gemeinwohleffekte‘ (effects for the common good) against competitive repercussions. Yet there is no equivalent at EU-level for this.

Joe Kaeser, Siemens CEO, called the decision ‚technically right‘ but ‚wrong for Europe‘. This hints at the root of the problem. The rules of the game have changed.  Liberal and multilateral trade policies have come increasingly under threat from mercantilist policies with their epicentres in Washington D.C. and Beijing. Within such an environment calls for a ‚European Champion‘ (tantamount to Airbus) will only intensify.

As the saying goes: Tempora mutantur, nos et mutamur in illis

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On Huawei, Montesquieu and Trump’s discomfort:

Bildergebnis für huawei 5g

After ZTE, Huawei has become the second victim of the Sino-American trade spat. Huawei is a global leader in the development of 5G (fifth generation of mobile internet), upon which machine-to-machine interaction relies.

Huawei is a case-study of American discomfort with China’s state-led economic approach: the company has been accused of stealing intellectual property (1), its founder served in the Chinese PLA (people’s liberation army) (2), and its technology has military and private-sector applications (3).

Recent concerns were related to Huawei’s technology possibly including ‚malicious implants‘ in critical network infrastructure. This could – so the thinking goes – enable the Chinese government to spy on foreign countries – or even worse carry out cyberattacks.

So far, the Trump administration banned all government entities from using Huawei’s and ZTE’s technology. It’s considering extending the ban into the realm of the private sector, too.

As of now, no evidence for these allegations has been found. Yet it’s interesting to see how quickly several Western countries (Australia, New Zealand) followed suit. Germany has launched a committee revolving around Huawei and 5G infrastructure development.

The root of the American discomfort with Huawei’s operations might boil down to Montesquieu, an ancient French political philosopher, and his concept of ‚trias politica‘.

In the West, there is a strict legal process for governments intending to access private communication (e.g. remember the FBI-Apple encryption dispute after the San Bernardino shooting). In China there isn’t. Thus, there is an increasing fear amongst Western countries that the CCP might be forcing companies, such as Huawei, to access users’ private data – all for the sake of ‚national security‘…


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Onto the Next Hurdle


What happened?

Last Sunday Theresa May, British Prime Minister, reached an agreement with fellow EU leaders on the United Kingdom’s intended withdrawal from the European Union (EU).

This came hours after Spain and the UK reached a last-minute agreement on the future status of Gibraltar, a British overseas territory. While Theresa May may have overcome one major hurdle, the next one already awaits her: parliamentary approval.

Why does it matter?

May is confronted with the unpromising scenario that neither her own party, the Tories, (1), nor the opposition (2), nor the population (3) supports her withdrawal deal. In case May fails to master ‘the art of the deal’ – and, thus, cannot secure a parliamentary majority at home – the UK risks crashing out of the EU without a deal. This would lead to a so-called ‘hard Brexit’: leaving both the single market and the customs union.

 What’s next?

(1): While the EU and the UK could, in theory, renegotiate another deal until the 29th March, this seems unlikely. It already took months to reach consensus amongst the 27 EU member states. Last week’s stand-off with Spain showed the fragility of the negotiations.

(2): It’s difficult to make forecasts in this fast-moving environment. May has been written off numerous times. Yet in the end she has proven remarkable resilience. This is largely due to her divided opposition, which struggles to get the 48 required votes to topple her.

(3): The idea of a second referendum gets thrown around from time to time. Whether this would imply a second referendum on Brexit itself, or on the content of a Brexit deal itself remains unknown.

Yet it’s important from time to time to realise the different perceptions about the EU. The vast majority of the British population perceives the relationship with the EU to be mainly of economic nature, as opposed to the rather civic interpretation widespread on continental Europe.


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On Shadow-Banking, the Infectious Belt, and the China Dream


What happened?

Back in 2013, Riad Ajami argued that China found itself in the midst of the ‘Middle-Income Trap’.

To Ajam, the key challenges awaiting the People’s Republic were:

  1. A sustained slow-down in state-directed infrastructure investment
  2. Growing industrial over-capacities
  3. The cheap labour pool running out
  4. Systemic risks due to unhealthy debt levels (‘shadow banking’)

Fast forward five years, what happened?

  • The CCP largely diverted state-directed investment towards high-tech – especially A.I.

  • Xi’s grand ‘One Belt, One Road’ initiative can be comprehended as an endeavour for opening up new markets for the domestic industrial over-capacities – besides vying for geopolitical influence.

  • As China attempts to avoid the ‘Middle Income Trap’, being the world’s manufacturing hub would no longer be an option anyhow. Chinese factory wages increased by 70% since 2011. More so, (industrial) pollution is one of the few issues that could threaten the CCP’s legitimacy.

  • It is estimated that China’s shadow-banking system grew close to $10 Trillion over the past decade (coming close to 90% of China’s GDP). All outside of the realm of government regulation.

Why does it matter?

Last year, Xi said that debt was one of the greatest threats to financial stability. The CCP has had the issue on its radar for a while now. However, each intended government crackdown led to new innovative debt instruments.

The Chinese proverb that ‘heaven is high and the emperor far away’ continues to hold true for many local governments. Yet it complicates the central government’s efforts in tracking down debt.

More so, vested interests further blur the picture. Xi’s recent centralisation of power can also be interpreted in that light. He needs to centralise power in order to take on the challenge.

What’s next?

While Xi’s geopolitical vision, as part of the ‘One Belt, One Road’ initiative, has been much applauded, one big risk associated with the undertaking remains largely overseen. The Belt is highly infected with institutional grievances.

While China might benefit from the (often) corrupt and autocratic governments in the short-term, it should be wary of associated risks with these types of governments in the long-term.

Last but not least, China is unlikely to back down in the Sino-American trade dispute for two reasons:

  1. For China it’s about more than trade. Ever since Obama announced his ‘pivot to Asia’, China has been suspicious about US’ intentions. The Trump administration’s hostile stance towards China further confirmed this perception. For China, it’s about Thucydides’ troika of themes:

i. Honour

ii. Fear

iii. Interest

And even more so about realising the ‘China Dream’. Backing down against the US would cast doubts about the CCP’s ability to realise Xi’s visions.

  1. Xi doesn’t have to worry about re-election, stakeholder costs, and parliamentarian majorities – unlike Trump with the midterms coming up. Thus, Xi is relatively immune to short-term economic blows with a strong set of centralised state-tools at his disposal.


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A Crisis Waiting To Happen

static.politico.jpgWhat happened?

Standard & Poor’s, the credit-rating agency, downgraded Turkey’s sovereign credit rating into ‘junk territory’. It expects further currency volatilities and forecasts a recession for next year. Since the beginning of the year, Turkey’s Lira has dropped 40% in value against the US Dollar. This is the result of:

  1. Failed efforts by the central bank to curb inflation
  2. Turkey’s vulnerability to declines in global liquidity
  3. The country’s diplomatic dispute with the US

Why does it matter?

The time of cheap money is running up. Central banks across the world are gradually tightening the reins. Capital becomes scarcer and more expensive. This negatively affects countries, such as Turkey, that are highly dependent upon foreign capital. Erdogan financed his massive infrastructure projects (that drove the economy for a good time) with foreign capital.

Turkey’s currency reserves further dropped below its short-term foreign debt levels. More so, Turkey has had for years a trade deficit. Foreign debt and trade deficits are per se not toxic. Yet they need to be financed with steady capital inflows. Because of Erdogan’s policies and the globally decreasing liquidity, this influx has faltered.

What’s next?

The need for reforms is high in Turkey. Thailand could serve as an example. In the aftermath of the East Asian Financial Crisis of 1997, the country fundamentally reformed itself. Nowadays, it has a trade surplus of 10% of its GDP. The ratio of currency reserves to short-term debt stands at 3:1. The upside of these developments could be seen last week. While various emerging markets’ currencies suffered, the Thai Baht remained stable.

As of now, it doesn’t look like a contagion risk for emerging markets. We are rather dealing with price-adjustments for risk.

The Turkish government would be well advised to:

  1. Raise interest rates
  2. De-escalate tensions with the US
  3. Sign an external funding agreement with the IMF

Since these measures will come with explicit and implicit costs, it seems unlikely that Erdogan will push for any of these soon.

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Caught in the Spiral of Sanctions

rtxnnjh.jpgWhat happened?

On Tuesday a new set of US sanctions was imposed on Iran. This comes three months after President Donald Trump announced the US’ withdrawal from the JCPOA (‘Joint Comprehensive Plan of Action’). The new sanctions limit Iran’s access to foreign currencies. More specifically, it bans Iran’s ability to purchase US Dollar banknotes. In addition, they target critical industries for Iran, such as carpets and pistachios. The country’s energy sector has been exempted for now, yet sanctions will become effective in November.

Why does it matter?

Unlike the other spats of the Trump administration, such as with the EU or North Korea, there is no plausible way out. With the US administration being keen on regime change, Trump won’t make any concessions to the Iranian regime. Instead he is more likely to double down with the US’ economic might. The US possess exorbitant sanctions power for two reasons:

  1. The US Dollar is the world’s reserve currency
  2. The US Dollar underpins international trade

What’s next?

Iran’s economic situation will deteriorate sharply within the next few weeks. By November (when the oil sanctions snatch), the Iranian regime will have little options but to get back to the negotiating table with the US. It will be interesting to see how other JCPOA signatories (especially China and Russia) respond.

While they have pledged their adherence to the nuclear deal and trade, it is doubtful that they will risk being hit by secondary sanctions. Several European companies, such as Daimler, have already abandoned their Iranian operations.

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2018, the year the Techlash materialised


What happened?

Margrethe Vestager, European Commissioner for Competition, has fined Google, an Alphabet subsidiary, $5.1 billion for breaching EU antitrust rules. Google has been charged with forcing Android phone manufacturers to pre-install various Apps. Thus, Google has been penalised for using Android to solidify the dominance of its own services – most importantly Google Search.

Why does it matter?

The ruling comes at an interesting time. It differentiates Android from its competitors’ operating systems (OS). Thereby, Apple’s OS is seen as an exclusive, vertically integrated system as opposed to Google’s Android, which is open-source. More so, it’s the second time within a year that Google has been fined by the European Commission. Back in 2017, Google has been fined for giving its own shopping comparison service an illegal advantage.

 What’s next?

2018 will be known as the year in which the Techlash materialised. The year commenced with the Cambridge Analytica scandal that culminated with Mark Zuckerberg, CEO of Facebook, testifying in front of Congress. The hefty fine against Google illustrates the rift across the Atlantic. A few pointers accounting for the differences in American and European regulation:

  1. Antitrust Laws: US focussed on consumer welfare vs. EU focussed on competition
  2. Societal Values: American Libertarianism clashing with the European notion of Social Justice
  3. National Interests: US sensing the breath of Chinese competition vs. the EU lagging behind


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Alphabet, Blockchain, and Recovering Lost Ground


What happened?

Sergey Brin, Google President and Co-Founder, said that Alphabet ‘failed to be on the bleeding edge’ with respect to Blockchain at an invite-only Blockchain summit, hosted by Richard Branson last week in Morocco.

Why does it matter?

Google, otherwise known for embracing revolutionary technologies, such as A.I., early on, has so far kept its fingers off Blockchain. Especially Google X, the company’s secret research lab, has frequently experimented with cutting-edge technologies over the past decade. This led to various promising projects, including ‘Project Loon’, intended to bring Internet access to remote regions, and ‘Waymo’, focused on self-driving cars.

What’s next?

While Alphabet hasn’t announced any Blockchain projects, rumours about the company exploring potential use cases of the technology have circulated for a while. It’s widely speculated that Google, as an Alphabet division, is working on its own Blockchain-related technology to support its cloud business line. In this case, Google could reassure its clients that their data is safely stored. According to pundits, Alphabet has been a leading acquirer of start-ups involved in the field. While not much has been announced officially, much more can be expected to come from the company that prides itself in being an Internet pioneer.


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A small step for Boris, but a giant leap for the future UK-EU relationship?


regierungskrise-in-london-britischer-aussenminister-boris-johnson-zurueckgetreten.jpgWhat happened?

Both Boris Johnson, Secretary of State, and David Davis, chief Brexit negotiator, resigned on Monday. This happened after Theresa May, UK’s Prime Minister, secured her cabinet’s support for a soft Brexit blueprint over the weekend. The Pound rose as a result and British business lobby chambers seemed pleased with the draft. In contrast, David and Johnson saw the proposal contradict with their convictions favouring a hard Brexit, forcing them to step down.

Why does it matter?

Disappointed members of May’s Conservative Party are expected to push for a vote of no confidence this week. It’s uncertain whether the vote will secure the required 159 votes. If it were to succeed, May would be toppled and the UK would slide into crisis. In case the vote fails, May will have successfully pushed through her soft Brexit proposal – for now. The next few days will be important not only for the UK but also for its future relationship with Europe.

What’s next?

Last weekend’s Brexit blueprint revolves around a new UK-EU free-trade zone with identical regulations for goods. Financial institutions in London were warned that they were likely to lose existing levels of access to the EU market. Officials in the EU welcomed the latest developments. They hope to move forwards with settling the precise divorce terms. More so, they intend to draft the basic structure of a future trade deal by the end of the year.


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