Most Eurointelligence readers will probably not be familiar with the concept of a token, unless they spend time in casinos. In the US, the crypto exchange Kraken just launched a token that allows people to trade US equities at virtually no transaction costs. The token represents a claim to part of an asset. You may wonder, what’s the point here, since we already have low-frills, low-cost retail brokers. The big idea here is to provide a direct link with the savings and investments. Right now, we are talking about the tokenisation of existing equities. The next step is the merger of the two: companies raising money by launching tokens, sold on crypto-exchanges directly to investors.

People often criticise cryptocurrencies because they do not see an obvious economic value. With a tokenised equity, the value is more apparent. They reduce friction by taking out the middleman, the banker, very much like Amazon cut out the retailer. But if you think this forward, tokens are not just taking out the bankers. They are taking out parts of the capital markets themselves. All that separates the company that issues those tokens and the buyer is a blockchain. The trading of tokens occurs on an electronic exchange.

As the former Fed chairman Paul Volcker once quipped, financial innovation is rare. The only one he observed in his long life was the introduction of the cash machine. Most financial innovations of the past are just ways of hiding credit.  Tokenisation is real innovation.

So why do we even mention this in a European focused newsbriefing? We have written a lot about a capital markets union as a prerequisite for ending the massive misallocation of capital, which we have identified as the main cause of Europe’s technological backwardness. The idea of a capital markets union would be to bring to channel Europe’s excess savings directly to assets, cutting out the banks. But the banks would still run the capital market. The crypto token cuts out both the banks and the market, and would constitute a clever, 21st century alternative to the capital markets union – except for automated crypto-exchanges. You would still need a place to trade the stuff.

Not that we expect the EU to jump at the idea. Italy’s very low sovereign debt spreads would almost surely be higher without the Italian banking system. And the Germans could not maintain their mid-tech sector without the banks pouring money into hopeless sectors. We expect a lot of resistance, but this is like resisting the internet.

The problem with the Europeans is that they never had to think strategically in foreign policy, and that they are suddenly confronted with a situation in strategic thinking matters. Our leaders are getting a lot of bad advice from people doubling down on their previously complacency. Wolfgang Ischinger, the former head of the Munich Security Conference, said the priority for Friedrich Merz should be to keep Donald Trump on the leash over Ukraine. If this current, Vatican-hosted, peace process between Russia and Ukraine fails, the Europeans will be on their own.

Does anybody have an actual strategy for Ukraine to defeat Russia – in the sense of pushing Russia out of the occupied lands, or at least to a position where Ukraine could negotiate an advantageous peace deal? We heard the Lithuanian defence minister, Dovile Sakaline, say the only way to negotiate with Russia with the gun on the table. That may well be true. But it is not going to be a Lithuanian gun, is it? This is the problem when small countries do foreign policy. It's the military equivalent of the beggar-thy-neighbour phenomenon in economics. It's other people's guns.

Europe has a history of stumbling into wars, and that is still a possible scenario, especially if a majority were to following the hardliners from Lithuania and Estonia and confront Putin militarily. One of the fastest way to enter into a direct military confrontation with Russia would be to freeze the Euroclear assets. We note that Foreign Policy is now virtually running a campaign to push the Europeans to take such action, with yet another article making the case for a seizure.

The sequestration of financial assets can be ordered by an international court. But such assets cannot be unilaterally sequestered. This would constitute an act of war. More importantly, it would be interpreted in Russia as an act of war. This is like a blockade, which from a perspective of strategic military planning might deceptively look attractive. Are we seriously suggesting that the EU should go to war with a nuclear power without the help of the US? Or will we be shocked that Trump will not come to the rescue? Why would he if the war occurs due to action taken by the Europeans themselves? They have not thought this through. 

Israel is starving Palestinians in Gaza to achieve its military goals. After an eerily long silence that accompanied Israel's ground offensive, western nations are starting to react.

In a small but significant move, the UK government suspended trade talks with Israel and a majority of EU states agreed to start a review of its trade partnership with Israel. The pressure on the leaders who are still defending Israel’s actions is growing. The Spanish parliament passed a non-binding motion calling for the government to impose an arm embargo against Israel.

The most significant move, however, will come from the US. We understand that Donald Trump has also put pressure on Benjamin Netanyahu, but Trump has yet to decide of how he wants to proceed. On his Middle East tour he hardly mentioned Gaza, only to say that they are starving in Gaza and that they are going to do something about it. This week JD Vance was expected in Israel but decided not to go.

Netanyahu granted some aid delivery to get into Gaza after 11 weeks of complete blockade. This gesture is more to soothe the international community, not to take off the pressure on Palestinians. The details that emerge suggest that it will be far from what is needed. The plan is to set up several distribution centres which will be secured by Israeli military and managed by US contractors. Food distribution centres will be south of the Netzarim corridor, which splits Gaza in the middle. Those coming from the north for food will have no right to return once they passed through the screening.

The humanitarian emergency in Gaza happens in a wider political context. What happens with Iran or Syria and Lebanon matters for the future of the region and Israel’s role in it. Arab leaders have told Trump in private that Palestinians need their rights guaranteed. The US had also been talking to various nations about whether they would be ready to take Palestinians while Gaza is to be rebuilt. Trump evoked once again US ownership in Gaza on his Middle East tour, though Israel is making this look like another Vietnam to step into.

Does Trump still believe that he can sort out the mess in Gaza by going into it and make it all look nice? Or is he ready to confront Netanyahu, something what none of the previous presidents ever really did? Trump, the real estate developer, and Trump, the peacemaker, will eventually have to come up with a plan. And he needs to take Israel’s reaction into account. What would Netanyahu do if Trump shows him some tough love? Netanyahu could dig himself in with his far-right coalition partners rather than to moderate. It could increase the settlers’ radicalisation.

Netanyahu clearly misread Trump 2.0. He was banking on Trump as a reliable ally in his peace-by-force efforts. Trump’s Riviera plan for Gaza was used as a template for which Israel is doing the groundwork. The resumption of the war in Gaza had as its goals the idea to finish off Hamas and to make Gaza as uninhabitable as possible, so that more Palestinians would want to leave. But Netanyahu's decision to conduct war through starvation has now started to backfire on Israel.

Of the EU’s supposed four freedoms, perhaps none have the totemic status that freedom of movement does. The right to live and work in any of the EU’s 27 member states is one of the most concrete guarantees that it gives its citizens. Freedom of movement was the focal point of the long, drawn-out process of Brexit in the UK. The idea that it could return still ties UK governments in knots. 

There is a solid economic logic behind the free movement of labour. Workers should be able to travel to wherever they may be most productive. Opening up movement of labour prevents countries from undercutting each other with cheap labour costs. Skilled workers can gather in clusters, which improves productivity too.

Labour mobility in the EU basically exists in theory, but not in practice. According to data compiled by the IMF, as of 2023 mobility between US states vastly exceeds that been EU countries. Across the EU, fewer than 5% of citizens live in a country outside the one they are originally from. The proportion of Americans who live in a US state they weren’t born is 5-6 times that level.

Expecting the same level of intra-EU mobility that exists between US states wouldn’t be realistic. Cultural and especially linguistic differences between different countries impose stiffer, immovable barriers to mobility. The proportion of EU citizens living in another country is, however, still extremely low given that.

There are a number of barriers to mobility that are within the EU, and its members’, gift to change. In particular, many obstacles to professional mobility due to a lack of qualifications recognition still exist. Luis Garlicano gives the example of ski instructors, who still face difficulties translating their qualifications across borders, and sometimes within regions of the same country.

What’s dispiriting to us is that this hasn’t changed much, despite the problem being widely recognised for about as long as the EU has existed. It is one of the many Single Market areas where we don’t think there will be a meaningful shift without further political union.

This is because without it, the constituency that would push for the change doesn’t exist. Politics in Europe happens through interest groups and lobbying. EU citizens who live in another country, or wish to move, are scattered across the union’s 27 member states. When they live abroad, they often do not have the right to vote in their new homes, instead retaining the right to vote in their countries of origin. Many might not vote there because most domestic political issues no longer affect them.

Lobbies pushing the other way, scared of foreigners muscling in on their businesses, are more numerous, and powerful. They are the product of a politics that is still fundamentally national. Unless this changes, we doubt that freedom of movement’s promise will truly be kept.

Donald Trump says a lot of things. Whether it is in a long, rambling speech or a block capital-filled social media post, Trump likes to talk, and often contradicts himself while doing so. This may be intentional, or it may not be. But the key with someone like him is to try and pay less attention to what he says than what he does.

This should also be the golden rule for anyone trying to figure out what his presidency means for oil markets. At the beginning, Trump said that he wanted oil prices to come down, and for US oil production to go up. To anyone with even a passing familiarity of the US oil industry, those statements were contradictory. US oil producers often face higher break-evens than other global competitors, and lower prices are bad for business.

Trump was always going to have to choose between the two. The smarter political bet was always that he would go for lower prices. So it has been so far, it seems. Brent crude is about $10 a barrel down year-to-date. Some of this has been unintentional, we are sure: Trump’s tariffs were not, we think, some master-plan to lower oil prices.

But Trump has also been active in lobbying Opec to bring production up, and prices down. We believe it is plausible that one explanation for the cartel’s recent boost to production is that Trump has asked for it, and is prepared to repay those two follow up in kind. Saudi Arabia and the UAE pump more oil. In return, they get an improved relationship, and access to technology, from the US.

One of the casualties of this, however, is likely to be the US’s own oil industry. Diamondback Energy, one of the US’s biggest shale oil producers, warned a couple of weeks ago that it expected US oil production to decline. We have seen a host of other warnings since. The Wall Street Journal even says it’s possible that it could be time for peak shale.

We would not be so quick ourselves to write off the US oil industry. There have been previous booms, and busts, and then booms again. But the situation does look dire, especially in a world where the largest oil importer, China, is pushing ahead with efforts at diversification. Although Trump has walked back many of his tariffs, geopolitical fragmentation, and a resulting slowdown in global trade, may also be a persistent secular trend.

When Donald Trump talked about 5% defence spending of GDP as a Nato target, this was not something he had agreed with allies. No report was ever written to conclude that, for Nato, this is the optimal number. It is just a number he plugged out of thin air because it sounds good – like the 24 hours it would take him to resolve the Russia-Ukraine war. If his Nato partners agreed to, say, 3%, instead he would have gone home and claimed to have received a very good deal.

Yesterday, Johann Wadephul, German foreign minister, unilaterally adopted the 5% as a target for Germany, without consulting the coalition partner, the SPD, and without any plan of how to implement this. The 5% is mercifully not quite 5%, but 3.5%. The remaining 1.5% is general infrastructure that has potential military applications, like roads and railways. But this is not to be taken lightly. We are starting to bias our infrastructure fund heavily in favour of roads and rail, and away from the energy transition and digitalisation. As for the pure military part of the 5% - that's €140bn, compared to €50bn now.

The defence minister, Boris Pistorius, spoke about an increase in the defence budget from €50bn to around €100bn going forward – that’s around 2.5% of GDP. So the foreign minister just piled another 1% of GDP on top of that.

So how to spend it?  

The big idea idea in German politics is the re-introduction of the general draft. Pistorius said something in a recent interview that any spreadsheet warrior should take note of. He does not have the barracks to accommodate the new troops if they were drafted now. He does not have the instructors to train them. He does not have the offices to register and test them. During the peace dividend years, the Bundeswehr degenerated into becoming a recruiting ground for young men from difficult social backgrounds. Here at Eurointelligence we reported at one point in the last decade that almost all of the Eurofighters were dysfunctional because the defence ministry had run out of money. 

Ukraine show us how to grow an army from almost nothing to the largest armed forces in Europe in a few years. But unlike Ukraine Germany faces a constraint. There are not enough young Germans out there. During the Cold War, the German army had 400,000 troops. The draft ended in 2011, and the army has since shrank to 185,000. They sold the barracks and land. They sold the recruitment offices. The Bundeswehr turned into a small professional army.

The CDU wants the draft back – but here is the catch. The CDU programme talked about a long-term commitment. The SPD and Greens favour the Swedish model, where the country registers all the potential recruits of one of year, and then takes the volunteers first, and only then they start to draft others when an actual need arises. The political problem for Friedrich Merz is that the only party that favour the general draft is the AfD. And no matter, which version of a draft the government will eventually agree, they will have to offer the softer alternative of a compulsory social year. The big problem the Bundeswehr is facing is demography. There are about 1m 28-year olds, but only 800,000 18-year olds, and only 700,000 newborns.The German constitution does not allow the draft of woman - so that's your population of 18-year old divided in half.

The amount of money you spend on hardware is related directly to the number of troops. We would suspect that much of the money – if it was ever agreed – would go to imported AI-based military equipment. In terms of military AI the five leading countries in the world are the US, China, Russia, Israel, and the UK. North Korea is coming up fast. Germany is not a big player in this area. What we suspect will happen, is that these 5% will end up where the previous 2% end up, a phantom target for spreadsheet warriors. 

You can see the differences between expressed preferences and revealed preferences everywhere in Europe. That is no less true of security and defence. There have been numerous calls for European countries to do more together, to reduce waste and inefficiency, and invest more in advanced defence capabilities. But the execution of this is, so far, lacking.

One of the latest examples of this comes from Italy, thanks to its infamous golden power rule. KNDS, a Franco-German defence industry giant that produces the Leopard tank, wanted to acquire Renk, a large German defence firm that makes tank gearboxes. But Renk has a small, and new, subsidiary in Italy. As a result, KNDS asked the Italian government for an exemption from its golden power rules ahead of the merger. No answer arrived from the Italian government by Monday, when the deal was supposed to close.

As a result, it might now be scuppered. The deal was based on KNDS exercising an option to increase its stake in Renk by buying shares from Triton Partners, a private equity firm. But thanks to Germany’s big defence spending buildup, Renk’s shares have become a lot more valuable recently. This has made the earlier agreement less favourable to Triton as a result.

KNDS claims the pre-approval from the Italian government wasn’t necessary for the deal to close. Triton disagrees. The two are now fighting it out in court in Germany, after KNDS sued Triton over it not transferring the shares from the option to KNDS.

It’s possible that this will end up being another dispute that the Italian and German governments have to resolve between them. La Stampa reports that it may be on the agenda during Friedrich Merz’s upcoming visit to Rome. The KNDS-Renk merger is of obvious interest to the German government, and this issue with golden powers comes in the context of a larger dispute over the UniCredit-Commerzbank merger.

Deals and mergers in the defence industry will, of course, always be more complicated than in most other areas. But whether it is appropriate to hold up a deal like this, which only trivially concerns Italy and is in any case related to two Nato allies, is another matter. Some argue that, in a hypothetical scenario where Italy is under attack, whether its allies can build tanks efficiently to support it matters more than the fate of this small Italian subsidiary.

If Triton can successfully manoeuvre its way out of the deal thanks to Italy’s golden power rules, this should be cause for reflection. We are still far off of having anything like a single market in defence. In fact, if one looks at the expansion of these golden power rules, the situation is the opposite: the national security argument is making its way into other areas too.

It was not that long ago that Christine Lagarde referred to crypto currencies as funny money. It won't be so funny for the central bankers once they find out that crypto currencies are starting to make it more difficult for them to run monetary policy. 

There are various ways in which this can happen - through a vanilla crypto-currency like Bitcoin, or more likely through blockchain-based derivative products, like US-dollar denominated stablecoins. The latter is a financial derivative that guarantees the holder the equivalent of one dollar per coin. Superficially, stablecoins have characteristics of known economic systems, like a currency board, where a central bank stabilises a domestically issued currency through a one-to-one backing of dollars or some other currencies. But a stablecoin can also have characteristics of a bond or money market security. It can be issued. Donald Trump and his family have issued meme coins. These coins don't come with a coupon like a bond. If the US amasses a strategic crypto reserve, then crypto-assets become party of the US government's loanable funds. 

The ECB is trying to fight the funny money through the launch of a digital euro. This is not a done deal yet, but the central bankers are all in favour. Once a European bureaucracy gets going, it is hard to stop. The argument in favour of a digital euro is superficially attractive: digitalisation is going to happen anyway, so let it be a digital version of a trusted fiat currency, rather than private money. The big fear is that digital always ends up displacing previous technologies, and it could happen to money too. It is the central bankers' worst nightmare.  

We think this is quite the wrong way to think about this. There is value in a well-managed fiat currency. The anonymity, the bearer-certificate nature of money, is what gives money a characteristic that cannot be matched by electronic payments systems.

The US is not going down this route. The Federal Reserve and the US government both oppose the digital dollar, and prefer the coexistence of the fiat with the new private-sector alternatives. We think this is the right approach - though we are not as Panglossian as the current US administration appears to be about the financial stability risks. We think that stablecoins in particular require regulation. 

While the European argument about the necessity of a digital euro appears superficially attractive, it misses the point of why people want to hold crypto-currencies. A digital euro will be a police tracking-device. When you get de-banked, you can go to another bank. When you get debanked by the ECB, your life is essentially over. Your crypto-assets cannot be confiscated. You can leave the country, and the money is still there.

There is no reason to think that private money will crowd out a well managed public money in the long run. The conservative central banker should have nothing to fear. But when a central bank loses sight of its main goal, as central banks all over the world have, then the private-sector competitors stand a chance. You cannot debase a bitcoin through a majority vote in a committee. This is one reason why economists hate bitcoin with a passion. 

Another is the notion that crypto is a throwback to the bad old days of private money - think of the US before the Federal Reserve. The historic development went from private to public. But that view would mis-characterise crypto. Bitcoin is not  private money. It is a layer above a blockchain. Private people can buy it, and sell it. 

In journalism, you come across a lot of rumours. The golden rule is that you should ignore all of them until they are officially denied. What happened yesterday is that the Elysée Palace and the chancellery in Berlin gave us an opportunity to talk about whether or not our leaders have a drug addiction. Great work!

This absurd episode could not have happened in the US, or China or Russia, because they are exercising some professionalism about the images of their leaders. Of course, it helps, if you only have one leader, not four. They don’t let photographers walk into their railway compartment to take a snapshot.

For us, the most disturbing aspect of the pictures was not the handkerchief or the spoon, but the ways the leaders interacted. Emmanuel Macron clearly looked like the boss. Keir Starmer and Friedrich Merz looked like people keen to please the boss. And Donald Tusk looked like someone who would rather be somewhere else. We know that snapshots can distort reality just as much as AI can. Remember the one about Angela Merkel appearing to push back against Donald Trump during a Nato summit? The difference then was that she chose that picture to portray an image of her standing up. It was a lie of course, but still, it was successful political marketing. This is mercifully not our business. But the photo of the four leaders having a good time on a train is not one we would have disseminated.

For starters, this is not a picture of a united Europe, but of four guys in a train. These four countries are Ukraine’s most important supporters. They represent four members of Nato, but they don’t speak for Nato. The UK is not in the EU. Poland is not in the euro area. The image of unity is very much at odds with known facts. This episode leaves us with the impression that the Europeans are struggling to be recognised as important, when the real actors in the upcoming peace talks are the USA, Ukraine, and Russia. This is not a great image. 

There is a familiar pattern in UK immigration policy. Something that one government does leads to a lot more immigration than they expected. Then there are successive promises to restrict immigration as quickly as it rose. These promises aren’t fulfilled, and the process eventually repeats. Each time, the irreconcilable political issue – the public’s desire for less immigration, versus the British economy and public sector’s increasing dependence on it – grows.

Now, we look to be at the promising end of the cycle once again. The British government will release a new immigration white paper, outlining its proposed policy approach, today. This has been heavily trailed in the media, and we have a good idea of what some of the most significant proposals will be.

They include lengthening eligibility periods for permanent residence from five years to 10, and introducing language requirements for dependents of foreign workers. But the most significant, and difficult-to-implement, proposal will be ending foreign recruitment of care workers. In 2023, almost half of all new care workers in the UK came from abroad.

By ending foreign care worker recruitment, Labour is arguably trying to tackle a problem that came and went. The big surge in people coming to the UK on care worker visas took place in 2023, when almost 146,000 visas were issued for main applicants. Last year, however, the numbers were much lower, more like 27,000. All visas for health and care workers, plus families, dropped from 348,000 to 111,000 over that time period.

The most plausible explanation for the big rise in overall migration to the UK that took place over that time period, from 2021-23, is a coincidence of two factors. One is a sudden change in visa rules, which happened at the same time as the end of free movement to and from the EU. The other was the end of the Covid-19 pandemic. People who had postponed work or study abroad because of pandemic-era restrictions could move again, and did.

Because this was a one-off, what we’d expect is that net migration to the UK would fall on its own. This is what is already happening. Net migration to the UK in the year to June 2024 was 728,000, very high in historic terms, but a 20% decrease from the previous year. Changes introduced by the previous government, namely a ban on graduate students bringing dependents to the UK, also contributed to the drop.

The risk for Labour is that the proposals end up overcooking it, especially on care workers. Because of this, what you could have are warnings that the sector may collapse without foreign workers, prompted by backtracking. Then you have a policy shift, and U-turn, that pleases nobody. Rather than heading off Nigel Farage’s Reform party, the big threat to Labour and the Conservatives alike, you increase the salience of immigration as an issue. That plays into Farage’s hands.

Labour’s bigger problem, and the UK’s, is a lack of a post-Brexit economic model. Reliance on foreign workers, and students, is downstream of that, and will not be resolved unless that is. But the pattern since the global financial crisis has been to treat the symptoms, and not the underlying cause.