Israel’s surprise bombardment of Gaza yesterday killed over 400 and injured many more. After two months of ceasefire, these massive air strikes are unlikely to be the last.

Benjamin Netanyahu said that further negotiations will only happen under fire. Mediators have reportedly been pushing Hamas to release Israeli hostages in exchange for a de-escalation after the strikes. Israel’s strikes and the end of the ceasefire bring Gaza back to the front of international politics just when Donald Trump was focussing on ending the war in Ukraine.

Internal political dynamics suggests that even in the best of cases there is no return to the cease fire any time soon. Itamar Ben-Gvir was reinstated as National Security Minister within 24 hours of the bombardment. Ben Givr quit when the government agreed to the ceasefire deal. Now that Ben Givr is back in government, Netanyahu cannot simply return to the ceasefire. He also needs Ben-Gvir’s party to pass the state budget on 31 March. Failure to get parliament’s approval by then would bring down the government and require elections.

What deal would there be to return to? Israel had signed the US three-stage plan for ending the war and freeing the hostages. Yesterday Israel reneged on its signature to this deal after it failed to get a better one. Israel wanted to extend the first phase and an earlier hostage release, but Hamas insisted on the initial deal. Hamas refused to release further hostages without entering into the phase 2 of the deal, which would have entailed a permanent ceasefire.

The two sides are thus once again stuck. Hamas rejects everything that is not an internationally guaranteed permanent ceasefire. Israel has no post-war strategy. It refuses to let Hamas be in charge in Gaza yet rejected all alternative proposals for Gaza over the past year, writes Al-Monitor.

What about the US? Netanyahu is about to recast himself into Trump mould. Netanyahu fired Ronen Bar, the head of Shin Bet, Israel's internal security agency, accusing him of disloyalty. He also stated his intention to fire the country's attorney general. Netanyahu had to attend hearings in a corruption trial involving his staff members. There are renewed mass protests against him too. Trump’s Riviera plan has been embraced by the government, including far-right parties, while the proposal from the Arab nations, backed by the Europeans, was immediately dismissed. Will acting like Trump and working on implementing his plan guarantee Netanyahu the backing of the US administration?

The US president has his own people to answer for. He promised peace once in office. If the war were to resume in full, this would then be a war under Trump’s watch that he can no longer blame on Joe Biden.

It has not been a fun winter if you are a European gas buyer or consumer. A relatively cold winter has meant that storage facility levels have fallen below those of the previous two years. European countries are still trying to figure out if we’ll have mandatory gas storage refilling targets in subsequent years. We’ve at least partly swapped a dependency on Russian gas for one on US liquefied natural gas.

One cause of these problems has been the way the Europe-Russia energy relationship blew up, both figuratively and literally, after Russia invaded Ukraine in 2022. But, as Vladimir Putin and Donald Trump prepare to talk about peace negotiations, could the gas eventually come back? Russia is clearly interested in exporting more of its gas back to Europe, to try and regain the markets it has mostly lost. Gazprom also has plenty of spare production capacity, and an ability to ramp this up quickly.

But there are two big, overarching questions. The first is how this gas will actually get to Europe. Nord Stream 2, directly from Russia to Germany, never came online. Both it and the first Nord Stream pipeline were damaged by an undersea explosion in September 2022, and would need to be repaired before being operable.

Yamal-Europe, another pipeline that runs via Belarus to Poland and then on to Germany, is also out of action. This is because of disputes between Gazprom and the Polish operator of the line. Consequently, the Polish government ended its intergovernmental agreement with Russia to buy gas via Yamal-Europe. To transit gas on to western Europe, this leaves the Ukraine transit network. There would need to be a new agreement between the Russian and Ukrainian government, as the previous one expired at the end of last year.

Another is what kind of contractual arrangement the gas would be sold under. Gazprom previously preferred signing long-term contracts with European buyers. But this caused problems for these buyers during the gas shut-off that occurred through 2022. Several of these buyers, most notably Uniper in Germany, were left in a very bad financial position after having to buy gas on the spot market to cover off lost Russian gas.

It's possible that Russia makes European buyers an offer they cannot refuse – gas at such a cheap rate that they cannot possibly say no. But there are still clear risks to signing long-term contracts that these buyers would at least need to consider, or get another counterparty involved with to mitigate. Trust is the most valuable commodity in any industry. Once it has been lost, it takes a long time to regain.

European governments face the following situation: low economic growth, an imperative to spend more on defence, already high taxes, and increasingly high welfare spending. Holding all of these together are not fiscally sustainable, and something will have to go. But figuring out what that something will be, or how it is going to work, is not easy politically. We can already see that in Germany’s turn to debt-spending, Italy’s own equivocation about higher defence spending, and what feels like the millionth French pension debate.

Now, in the UK, the issue is what to do over welfare budgets. Since the pandemic, there has been a sharp increase in certain kinds of benefits claims for long-term sickness or disability in the UK.

Personal independence payments (PIP) claims have gone up by 67%, or 310,000, from 2018-19 to 2022-23. The Office for Budget Responsibility’s own projections are that spending on PIP will rise from £18bn in 2023-24 to £34bn in 2029-30. It also expects that claimants will go up from 2.7m to 4.2m. Although it is possible to claim PIP benefits whilst working, only about a sixth of recipients do so.

A rise in disability benefits causes two issues for the government, which compound each other. The first is that, rather obviously, more people claiming the benefit puts extra fiscal pressure on the government. This is already at a time when low growth and persistently high interest rates are squeezing its own room for manoeuvre on fiscal policy.

The other is the impact it has on British labour force participation. Since the pandemic, long-term sickness has been a drag on the UK’s labour force participation rate, and the country has seen an increase in economic activity. This is despite an otherwise very tight labour market, with an unemployment rate of 4.4% in October to December of last year.

Labour wants to change the sickness and disability benefits system to try and get out of this quagmire. But it will be difficult to do so, given opposition within their own party. One discussed option was freezing PIP so that payments do not rise in line with inflation. But there was significant opposition to this from backbench MPs. The government, we think, is likely to try softer options, like changes to eligibility criteria and a so-called right to try that makes it easier for PIP claimants to work without losing their benefits.

This may be more politically feasible, and sensible policy-wise, than a broad-based freeze. But the question is whether the government can come up with a series of more palatable reforms that add up to the £5-6bn that Rachel Reeves wants to cut from welfare in the next spring statement. She will be delivering the statement on 26 March, not giving the government much time to figure out what to do next.

Ultimately, Sir Keir Starmer and Reeves' problem with PIP is that like an increasing proportion of the British populace, the British state itself is pretty sick, in a way that goes beyond this. Whether you're looking at pensions, the court and prison system, university funding, or healthcare, the UK has numerous issues that could, at any time, flare up at great difficulty and expense. Underlying all of this is poor economic growth, and the UK's persistent inability to find a post-2008 economic model. Bad growth begets bad choices, which beget bad policy. 

"Them good old boys were drinkin' whiskey and rye", wrote Don McLean in American Pie. In Europe, the good old boys soon no longer will when a 25% tariff applies to American whiskey from April. And any successors of Hannibal Lecter in the US will have to seek alternatives to fava beans and a nice chianti when Donald Trump makes good on his threat to impose a 200% tariff on European wine.

The Europeans need to stop hyperventilating, and start thinking this through. Trump takes two seconds to respond to EU's trade retaliation, while the EU is like a chess player that can only think about the next move. It is true that there are no macroeconomic winners in trade wars. But not everybody is losing to the same degree. The US is the relative winner. And politically, Trump is the absolute winner.  

What we find striking when visiting New York or Washington, DC, is the dominance of European wines in restaurants and bars, as well as European cheeses. The Europeans have not opened up their agricultural markets to US beef and US wine to nearly the same extent. Trump will not exempt the EU from the steel and aluminium tariffs. So unless the EU backs down from tit-for-tat retaliation, targeted specifically at industrial companies in Republican dominated states like Kentucky, the US will almost surely retaliate. The regime of reciprocal tariffs, which will be announced on 2 April, will make retaliation automatic. The EU - mercifully - does not have such a regime, but needs to take into account that we are dealing with an adversary who does. This dispute is not going to be settled on chairs in the Oval Office. Jean-Claude Juncker staved off a trade war when he famously promised that the EU would start importing soy beans, which it already did. Tricks like these no longer work. We take Trump very seriously in his determination to reduce the bilateral trade goods deficit.

A 200% tariff on wines and champagnes would effectively kill European wine exports to the US. Every price would triple. France would be most affected. The car tariffs will hit Germany the most. The US is by far the largest source of European exports. The UK, another willing absorber of other people's surplus savings and exports, is no longer in the EU. And China is playing the same surplus game that we do. The most urgent thing for EU leaders to do is not to have another meeting with Volodymyr Zelensky, or agree on round two in an unwinnable trade war, but to discuss the future of the European export-based economic model when the rest of the world no longer wants to absorb our trade surpluses. 

Unless of course, we really want to take this to the brink, and start slapping tariffs on imported services from the US. We would keep an open mind on this matter, but it would take quite a bit of gumption to see this through. US restaurants can offer American wines if the French wines are priced out of the markets. There is a wide variety of US-made cars. But we Europeans don't have our own versions of X, Facebook and WhatsApp.

Ireland’s prime minister Micheál Martin was the first leader from the EU to visit Donald Trump after the bust-up with Volodymyr Zelensky in the oval office, on St Patrick’s day, just when the EU enacted its retaliatory tariffs on the US. As an Irishman, Martin just knew how to create a good vibe despite tensions by focussing on the long and positive history of the US-Ireland relationship. He commended Trump for his unrelenting focus and energy in bringing peace to Ukraine and the Middle East. Martin also strikes a conciliatory tone on the trade front, assuring that there is room to negotiate a deal that brings investment back into the US.

In that sense, Martin is on his own peace mission, to find a solution that keeps US companies in Ireland, and as a mediator between the EU and the US.

Trump has a problem with Ireland's massive trade surplus against the US, €72bn in 2024 and the fourth largest the US has against any country. But, as John McManus pointed out in his column for the Irish Times, the focus on tariffs hides a more subtle reading. Because for Ireland, the more important goal is to keep US companies in Ireland.

The trade surplus relates to physical goods, which is more than counterbalanced by imports of services, with a deficit of €149bn resulting in an overall trade deficit. Much of the trade surplus comes from US-owned companies supplying chemicals, drugs, and medical devices back to the US. It is Ireland’s guaranteed access to the European single market that makes shipping drugs back to the US profitable.

Getting those US companies back to producing at home would not be difficult for the US administration. Trump could change the intellectual property rights laws that makes it profitable for the IT companies to stay there. Or he could pull off something similar to the Chips act, just for drugs. Would Trump do that? This could be politically and fiscally costly. The Irish are part of the DNA that makes up the US society. If he were to drain Ireland of US companies, he may lose Irish-American votes in the US. Martin’s red line is that he cannot compromise his country’s membership of the single market, as this is one of the main selling points for international companies to move to Ireland. A compromise will have to be worked out, which may have to include some outside the box thinking. The pharmaceutical US companies already started to increase their investments in the US, assured Martin. Maybe, this is the way to go.

The massacres in the coastal region of Syria last week were a warning shot and a turning point for the new regime. Authorities moved quickly to contain the fallout by setting up one independent committee to investigate the violence, and another to rebuild civil peace with members of the region, including Alawites. Within 24 hours of the events, the integration of autonomous regions into the new state apparatus was also suddenly possible. Ahmed Al-Sharaa, Syria's new president, signed an agreement with the commander of the Kurdish forces to integrate them into the central state institutions. A similar agreement has reportedly has been reached with the Druze in Al-Suwayda, though no details have yet emerged.

According to Muhsen al-Mustafa, the attacks were the first organised and large-scale insurgency led by a former pro-Assad military leader, Brigadier General Ghiath Dalla. He was allegedly seeking to impose a reality similar to the autonomous Suwayda in the coastal region for the Alawites. In his interview with Diwan, al-Mustafa also suggested that the insurgency was supported by Iran, with whom Dalla had worked closely in the past. This will probably not be the last attempt to disrupt the nation building in post-Assad Syria. Several other big geopolitical players, such as Russia, Israel and Turkey, play a key role here.

Last week’s sectarian violence is a reminder of the difficulties of integrating diverse communities and ensuring transitional justice. Nearly five months since the Assad regime fell, Syria cannot afford a weak government. The Europeans also have an interest in supporting state-building there as much as they can to improve conditions for Syrians at home. Germany seems to be on the ball. Within 24 hours of the committees being announced, the German envoy Stefan Schneck met with one of the seven judges, who are to investigate the events in the coastal region. According to analyst Benjamin Fève, Germany is setting the pace for European efforts in Syria. The question is: will this continue under Friedrich Merz?

In the commentary about the rapprochement between the US and Russia, China represents the large negative space of this relationship. China does not need to be part of this media blitz, but behind closed doors, China is gently reminding Russia that there are three powers at the table, not two.

To see the US-Russian relationship solely in its historical context would be a mistake. China had no major role to play in the Cold War, but it does hold many cards in its hand today. For Russia, an exclusive focus on the relationship with the US would make no sense in the current situation. And China has its own interests.

China backed Russia when the western world slapped sanctions on it after its invasion in Ukraine. Its bilateral relations increased on the economic and military front since then. Why would Vladimir Putin put all his might behind a fickle US partner across the oceans, when China turned out to be a reliable neighbour?

The joint military drill by Iran, Russia and China in the Gulf of Oman is a reminder that nothing has substantially changed on the ground. This is the fifth year of this kind of drill in a strategic location that links the Indian Ocean and the Strait of Hormuz, through which more than one-quarter of the world’s seaborne traded oil passes. A show of strength and a practice in cooperation between three autocratic nations.

A lot depends on what the US administration hopes to achieve in the long term. If it is serious about reconnecting with Russia not only for the sake of a Ukraine peace deal but also economically, trust will slowly have to be nurtured over time. This is not achieved by a couple of phone calls between Donald Trump and Vladimir Putin. And it would to involve Xi Jinping in some form.

The Middle East is heating up again, and big players are moving their positions in the region.

The Syrian government is struggling to contain violence against Assad’s Alawite minority, where hundreds have been killed over the past few days. New violence also means a new wave of refugees towards Lebanon, far from being in a stable position, and perhaps further to Europe over the Mediterranean sea. The Europeans are not ready for another wave of refuges, nor do they have the means or foreign politics to prevent such an outcome.

Syria’s troubles put the spotlight on Turkey and its superimposed patronage role in Syria. This is already irking the Arab nations in the region and Israel. Will the EU try to pay Lebanon and Turkey to hold back migrants again? This would not solve, but could instead potentially aggravate, the instability in the region. At home the threat of more migrants could also make it easier for far-right parties to exploit.  

There are also shifts in the hostage deal. Donald Trump’s administration started to talk directly with Hamas about the hostages, a move inconceivable in Israel’s political establishment. US hostage envoy Adam Boehler defended the move in the press saying that the US is not an agent of Israel and has its own particular interests. In other words the US is its own boss. Will Israel’s government speak up against it? After the scene with Volodymyr Zelensky in the oval office and the cut-off in intelligence and aid to Ukraine afterwards, Benjamin Netanyahu won’t do to Trump what he so often did to the three Democratic presidents before him.

And then there is Europe. Last Saturday, foreign ministers from France, Germany, Italy and the UK  came out in support for Egypt’s Gaza reconstruction plan, which is backed by the Arab League.

The proposal envisages a five year reconstruction effort for $53bn without displacing Palestinians from Gaza, a technocratic governance during the transition period without Hamas, and a two state solution clearly on the horizon. It is still too early to tell what the European backing means in concrete terms, but it is the first time they openly endorse a proposal that is rejected by the US and Israel.

The humanitarian situation in Gaza, meanwhile, is getting worse, as no aid gets through for a week now. Israel also decided to cut electricity that is essential for desalination plants in Gaza for drinking water. The pressure from Israel is part of the plan to make the place as uninhabitable as possible to get people to move out. Trump’s Riviera plan is still on the table. And the geopolitics behind this is shifting, with the US playing its Trump cards in the Middle East and Ukraine.

One of the major developments in modern warfare has been the emergence of drones as a potent military tool, which has changed modern battlefields. Drones provide a much cheaper way to conduct reconnaissance, and attack targets, at a large scale. One of the most recognisable faces of this shift has been the Turkish Bayraktar TB2 drone. It has also helped make Turkey a significant exporter of drones.

Baykar, the firm that makes the TB2, will now be making more significant inroads into Europe. Yesterday, it agreed on a joint venture with the Italian defence firm Leonardo. The two companies will produce drones for the European market together in Italy. They estimate that this market will be worth about $100bn over the course of a decade.

The Leonardo-Baykar tie-up points to another geostrategic question for Europe as it tries to figure out how to do without the US. There is a lot of talk of, and engagement with, the UK as a key European non-EU ally. But Turkey will also be important to any future European security architecture. Aside from the drones, and other aspects of the country’s defence industry, it currently has Nato’s second-largest army. Not to mention its key geographic position, controlling the Bosphorus and straddling both the Black Sea and Mediterranean.

When dealing with Russia, Turkey has often taken a different approach to its western neighbours. It has used a combination of dialogue and confrontation to manage its relationship with Russia where the two have overlapping interests, both in the Caucuses and in Syria. Now, however, Turkey seems genuinely alarmed at Russia’s sphere of influence growing larger if it ultimately wins in Ukraine. Recep Tayyip Erdogan has put his backing behind Ukraine, and has said that the country’s territorial integrity is paramount.

This alignment might make it easier for Turkey and Europe to work more closely together, either formally or through one-offs like the Leonardo-Baykar joint venture. But there are various other geopolitical barriers to further cooperation too. The most significant is Turkey’s strained relationship with Greece and Cyprus. It still has extant maritime territorial disputes with both, and the frozen conflict that has split Cyprus in two is further from being resolved than ever. Just last year, Erdogan once again dismissed the idea of Cyprus being reunified.

Then there is Turkey’s involvement elsewhere, most notably in Syria. At the moment, its presence there is arguably beneficial to the EU’s own interests. The new Turkey-backed government provides more stability, whilst potentially facilitating the return of Syrian refugees to the country. But this may not always necessarily be the case. Turkey’s backing for Azerbaijan in its various wars with Armenia has also proven politically contentious in some European countries.

As political and economic analysts, we have had our fair share of misjudgements. Forecasting is difficult, especially of the future, as Niels Bohr once said. The sentence is not as trivial as it sounds. It is not easy at all to forecast the position of the current economy – or the position of an electron for that matter. And the economic models used by central banks and market participants often cannot even forecast the past.

The best we can do under the circumstances is remove bias and noise. With Donald Trump this is very difficult. But it is the only way to remain sane. People have very strong views about Trump, and there is a lot of noise, much of it generated by himself and his administration. For example, on tariffs. He threatens a tariff. He announces a tariff. He suspends it pending negotiations. The deadline expires, and the tariffs are back. His commerce secretary then goes on TV to say that there will probably be a friendly agreement. Then Trump tells Congress to indicate that there will not. He says he had a friendly conversation with Justin Trudeau. We have to be careful with such words. A grin is not a smile. A friendly conversation with Trump is different from the friendly conversations we have with our friends.

In a situation like this, it is best to rely on revealed, as opposed to stated preference. We know, for a fact, that the reciprocal tariffs will come. Trading partners should take into account when formulating their responses. The US will auto-respond to anything we throw at them. If you run a large and persistent trade surplus against the US, like the EU does, you will run out of things to tariff before they do. Don’t do it.

On cars, the revealed preference is that Trump cares about sudden supply chain disruptions, but he does not respect supply chain arrangements. In his call with the US auto makers, which included Stellantis due its ownership of Chrysler, he agreed to a one-month reprieve, so that they could start re-organising their cross-border supply arrangements. Some components criss-cross the US-Canada and US-Mexico borders several times. A month is not a lot of time to unpick this, but enough to get the ball rolling and to start making immediate changes to a few highly exposed flows.

A tariff does not work like VAT. It’s 25% flat on everything that crosses the border. The biggest victims of this tariff are not the Europeans or Asians who export finished goods to the US, but those with highly integrated supply chains inside of the USMCA area.

The revealed preference of month one of Trump's second term is that they are much more strategic than Trump'm first term, and more strategic than we are. Trump withdrew intelligence services to Ukraine so that we cannot say No to a peace deal. Yesterday we heard it from the Danish prime minister - that victory was more important than peace. The more we say this, the worse it gets for us. We Europeans are used to state positions of principle, but we are not well versed in the art of strategic thinking. Strategic thinking is not a quality that is rewarded in Europe.

The same goes for trade policy. We take no views on the economic consequences of Donald Trump for the US, but we do believe that they will be negative for us. We are not only dependent on the US for security, but also as an absorber of our savings and export surpluses. This is a problem we are not going to fix through more public spending. It would require deep structural reforms to the way the economy is working.

The best way to respond to Trump is to do the exact opposite of what Justin Trudeau just did, and what the European Commission is about to do. Don’t engage with the guy on his terms. Don’t hit back. Neither the EU nor Canada will win a trade war with the US. They will end up blinking first, just as they are now starting to blink in the stand off over Ukraine. We can hyperventilate as much as we like about the Trump-Zelensky standoff. But we are clearly in the weaker position – not because of Trump but because of our own complacency. The solution is to fix our underlying dependency problems.