It was Sun Tzu who said:

“Know the enemy’s plans, and you will be able to anticipate them.”

Western leaders had a deep understanding of China and Russia in the pos-war era. They no longer do. That ignorance is driven largely by academics and policy community. A good example of how bad judgements transfer from academia to policy are the writings of Chris Miller, a renowned historian, and author of Chip Wars, a book on the history of the semiconductor industry and its geopolitical role. The book’s strength was that it brought a new perspective to geopolitics, but it also ended with a consequential misjudgement that unfortunately became the policy of the Biden administration. Miller concluded that China, despite many attempts, was incapable of producing semiconductors. Indeed, it is very difficult to produce high-performance semiconductors at scale. Taiwan has specialised on this. China did not. The Biden administration tragically concluded that it had a choke-hold against China when it banned high-performance semiconductor exports. The ban had the exact opposite effect as intended. It gave rise to a competitive Chinese semiconductor industry – one that is on the verge of catching up with the US. 

In a recent article in the Wall Street Journal, Miller has made another misjudgement – this time about Vladimir Putin. He says Putin is a tzar. He does not care about money like Trump.

“Economic outreach to Mr. Putin might work if he were interested in economics. But he isn’t.”

This statement is absolutely false. If US policymakers were to listen to this, they would be making another colossal misjudgement. Since he first became Russia’s president 25 years ago, Putin pursued a policy we would characterise as one of resources-based imperialism. He is an economist by training. He wrote his these on the subject of “Strategic Planning of the Reproduction of the Mineral Resource Base of a Region Under Market Conditions”. His gas deal with his German pal Gerhard Schröder was predominantly economic. It was not a geostrategic master plan. It was about the money. It was only after his annexation of Crimea that it became a geopolitical issue. But the plans were hatched a decade earlier.

One of the things the Trump administration got right about Russia is the understanding that economics is by far the best to way to end the war – to give Ukraine and Russia an economic perspective for the post-war era. The talks in Berlin that are going on right now would not have been possible without economics entering the discussions. They may still fail. But they are worth pursuing - if indeed peace is the objective. 

But be careful what you wish for. And remember Sun Tzu's warning.

Kyriakos Pierrakakis is the new president of the Eurogroup. Whether he will be a creative or efficient leader for the 20 countries that adopted the euro as their currency we have yet to see. This in part depends on his own capabilities as well as how he is seen by others. It also will be shaped by the events during his presidency. There are plenty of crisis scenarios that he could face during the next two and a half years of his presidency.

This job at the helm of the informal Eurogroup is usually reserved for the smaller member states. Last time it was Ireland. Now it is Greece. In his motivation letter, Pierrakakis referred to his generation being shaped by an existential crisis, the cost of complacency, necessity to reform and importance of European solidarity. He was of course referring to the Greek public debt crisis that kicked off in 2009. It forced his country to adopt three bailout programmes, one debt haircut and many painful reforms under IMF supervision. But the way he phrased it could also describe the situation today.

More than 15 years after the Greek debt crisis, public debt is once again a major topic for the Eurogroup. European countries accumulated public debt since the pandemic, which they find difficult to wean themselves off in this low growth environment. Their fiscal capacities are strained, and the pressures are high to meet the demands for Ukraine or Nato military spending increases.

Is Pierrakakis the man of the hour? Would he be the one to pull the strings in the Eurogroup if France was ever to experience a financial crisis? Will his background help or hinder him?

Pierrakakis's appointment is turning the page for Greece from the image of crisis to leadership country. At the same time, at home, legacy issues from the past suggest that some things are harder to change.

A massive fraud was discovered earlier this year involving agricultural EU fund payments to the OPEKEPE agency for farming that did not exist. As a result, a minister and four deputies had to resign. The government also reacted by transferring their responsibility over to the independent tax authority IAPR. This is part of Mitsotakis's promise of a technocratic overhaul, to clear out decades of an inherited corruption mess. The extent of the fraud is breathtaking and who benefited is still subject of an investigation.

This transition to this dream of a new Greece will take time and is not without growing pains. The transfer to the IAPR, for example, is now blamed for delaying payments to legitimate claimants. New Democracy MPs from rural areas criticised their own government’s strategy, arguing that it is turning the farmers against them. The PM's office first rejected meeting with farmers as long as their protests continue. The government was hoping that the disruption of their blockades would turn public opinion against farmers, according to Macropolis. But polls suggest that the public is overwhelmingly backing farmers. Trust in politicians to solve inherent problems is still low.

The Great Sea Interconnector is a massive submarine HVDC electricity cable project to link energy from Greece to Cyprus. It is one of the prime examples of a complex infrastructure project that Brussels would like to accelerate as a showcase for its energy transition. But it has met geopolitical pushback ever since the construction phase began in 2024.

The French cable laying company Nexans won the €1.4bn contract to lay 1200 km of cable deep underground, sometimes up to 3000 meters, which would make it the deepest electric link ever achieved. But while Nexans may come prepared for the technical challenges, the political challenges are outside its control. This cable project has become a matter for regional diplomacy. And instead of diplomatic solutions this project even risks exasperating regional tensions.

Turkey has been pushing back since work started. Les Echos writes that on several occasions between July 2024 and February 2025 Turkish warships ordered Nexans subcontractor to leave an area east of Crete and another Greek island of Kasos where the cable laying vessel was conducting its explorative missions. This phase of construction has since been halted, jeopardising also the laying of the cable that was scheduled for 2026.

To secure this project, Greece employed various diplomatic levers, even bringing Israel on board. It also signed a cooperation agreement on LNG gas with the US. The Greek government now hopes that the US would have an interest in supporting Greece, Cyprus, and Israel for their energy project in the Eastern Mediterranean. What could possibly go wrong by upgrading this cable project into a fetish for regional power projection?

Not only does this project sits right on the fault-lines of uneasy relationships between Turkey and Greece or Turkey and Israel. There is also Cypriot politics. Cyprus may seem to be the clear beneficiary of the project, yet the government in Nicosia is not embracing it with full force, and even is shifting its position. The principal opponent to this project is finance minister Makis Keravnos, who claims that the project is not viable despite many feasibility studies suggesting otherwise. As finance minister, he refused to pay the €25m deposit towards the project. Cypriot President Nikos Christodoulides seems unable to take a decision, but strengthened Keravnos’s position in a recent cabinet reshuffle.

Nexans is the company right in the middle of this diplomatic quagmire, and it has to pay a price for it. A recent article in the Cypriot local media reported that Nexans had suspended a tender for the project. It share price lost 6.8% that day before the company issued a denial. Politics and profit are closely intertwined in this project. 

One of the reasons why regulation is so pernicious are network effects. If a company is under a legal obligation to fulfil a regulatory requirement, it will offload it to others as much as it can.  

This is now going to happen with the supply chain law, euphemistically known as the corporate governance law. Its goal is to make EU companies responsible for their entire supply chain. This national version of the law is already in effect in Germany. In Brussels, EU member states have reached agreement to postpone the start of the new EU-wide law by one year to July 2029, and to make it compulsory only for companies with more than 5000 employees with a turnover of more than €1.5bn. The previous thresholds were 1000 employees and €450m in turnover.

Business lobbyists who pushed heavily for this change celebrated yesterday, but we think this might be premature. The problem with the supply chain law is a classic network effect: an SME that will in future be exempted from the law will still be part of the supply chain of a larger company that is not. And that larger company will be under a legal obligation to verify the entirety of its supply chain, including the suppliers’ supply chain. What appears to be an exercise in deregulation is nothing of the kind.

The law only applies to companies resident in the EU, not to Chinese importers. Economically, this law acts like a tariff for intermediate goods in production, the most counter-productive of all tariffs.

We have talked about regulation a lot on these pages, but regulation is not the deep cause of Europe’s techno-phobia. It is a social culture that gave us both the regulation and a tech industry that cannot compete globally. The business community is as much a part of the problem than the bureaucrats. One of the great AI hopefuls in Germany was Aleph Alpha, a company with a clever name, but as it turned out not a clever business model. As Handelsblatt reports, the company is about to cut its workforce by a third. One of the divisions is described as a reign of terror. When you read about all the corporate intrigues that are going on at this company, this sound more like a German industrial conglomerate than a 21st century tech start-up.

Alepha Alpha's management wants to downside to specialise to two sectors only, public administration and defence – low-hanging fruit because of new spending priorities of the new government. This means that the AI revolution, should it ever reach Germany, will come from US companies.

This is the problem when your AI strategy is partially funded by one of your main customers. Bosch has been one of the largest investors in the company. But it appears that Aleph Alpha did not provide the technological breakthrough Bosch had hoped for. Bosch, which is under a lot of pressure right now along with the rest of the German industry, is now selling the stake.

We were always sceptical of Aleph Alpha’s claim to specialise in large language models that are regulation-compliant. 

One unwelcome product of European political fragmentation is the increasingly common minority government. Administrations without a working majority now pop up in a number of different EU countries, including France and Spain, as well as in places like Sweden, where they have been established practice. Having to negotiate with other parties to pass legislation on a case-by-case basis is kryptonite for a governing agenda. It also allows smaller parties to drive up the bargain without taking any of the potential blame or accountability that comes with holding ministerial offices.

We might be adding another government soon to the tally, however. The Dutch coalition negotiations are in a stalemate at the moment. This is mostly because of the fact that one party, the liberal-conservative VVD, has various blockers against working with others. But because it is in a diminished political centre, it is also almost definitely going to be necessary in order to form a government. The VVD doesn’t want to work with Geert Wilders or his party, which is a very common position in Dutch politics. But it also doesn’t want to work with the centre-left.

The VVD’s preferred government would be one with two other centrist parties, the social-liberal D66 and centre-right CDA, plus the right-wing JA21. But there are problems with this too. D66 is more left-leaning and doesn’t really want to be in a government with JA21, though its red lines are not as thick as the VVD’s. The more serious issue, however, is that this coalition would have 75 seats in the 150-seat Dutch House of Representatives, i.e. not a majority. Working with the centre-left instead of JA21 would give this hypothetical government a sizeable majority, but the VVD is still ruling that out.

An alternative, which is now coming into focus, is a minority government. D66, the CDA, and the VVD would be in this government, and they would seek support from the centre-left, JA21, or both parties to try and stay in office and pass legislation. But to us, this sounds like a recipe for an early cabinet collapse. This group would only have 66 seats in the House of Representatives, 10 shy of a majority. It would be extremely vulnerable to coercion by supporting parties, not to mention the consequences of any coalition partner storming out in a fit of pique.

The problem is not just a Dutch one but a Europe-wide one. Politics is fragmenting not between the left and right, but within these broad political blocs. Switching between blocs is less common, though Dutch politics has gradually been drifting rightward. But switching within these blocs is.

Because of that, you have an incentive for parties to do one of two things, or both in the VVD’s case. You can exclude working with someone from the other side of the political spectrum, and also exclude working with a party in your own bloc that you consider extreme or out of step with your politics. The VVD’s various exclusions have ended up working well for it. But it is a nightmare to work around.

Almost all of Europe’s problems are long-term, and not particularly easy to solve. This is true too of one of the most biggest issues we have. The EU’s lack of deep capital markets leaves firms reliant on bank financing. This doesn’t just inhibit the growth of existing firms. It also makes it more difficult for new, innovative ones to come up. Bank financing favours incumbents with collateral, something start-ups and scale-ups often do not have.

This is something the European Commission has at least recognised. But the Commission has done something very European – starting with what they think is the politically viable route, and not what’s necessary to solve the problem. The result is that we get an approach that’s very heavy on trying to address the regulatory obstacles, including the most recent series of proposals from the Commission yesterday.

Because of this hammer-nail approach, we have some very familiar suggestions in the proposal. These include a new, so-called pan-European market operator status, as well as the transfer of numerous competences to the European Securities and Markets Authority. Under the Commission’s proposal, ESMA will also take over supervising the EU’s crypto-asset service providers.

These proposals are, in some respects, likely to be controversial enough in and of themselves. National regulators, and their governments, have often been loth to send powers over to European-level regulators, including ESMA. We do not expect this to be much different this time around, given the increased urgency of Europe’s economic stagnation.

But even then, regulatory barriers are far from the most significant reasons for the EU lagging behind on capital markets. One issue that has received very little attention but is more significant, in our opinion, is pensions. Jacob Kirkegaard has pointed out that Americans collectively invested about 140% of their GDP via private pensions vehicles in 2023.

Only a small number of European countries, including the Netherlands, do something similar. It’s no coincidence that the Netherlands also has some of the EU’s deepest capital markets, and with it one of the union’s most prosperous and innovative economies. But the Dutch collectively invest almost as much via private pension funds as the rest of the euro area put together.

Then there is the lack of a single safe asset, another clear deficiency compared to the US. Whilst treasuries sit at the base of the American capital market pyramid, we have nothing similar here for the euro.

We expect neither of these issues will be resolved anytime soon. Comprehensive – and genuine -  pension reform, much less a fiscal union, have already been put in the category of too hard to do politically. Instead, then, we get a Potemkin capital market.

We noted that FAZ has had an interview with a German computer scientist, who told readers that under no circumstances should they ever use ChatGPT for web searches. People have asked us often how this country of engineers has turned itself into a tech Luddite. Articles like this are one of the reasons. If a professor of computer science tells you not to use AI, then for sure, this must be right?

There are things that large-language models are good at, and things they are not. To know it, you have to get your hands dirty. This is why articles such as these are so damaging. They stop people from finding out for themselves.

It takes skills and knowledge to get the most out of a classic search engine, just as it does with modern LLMs. We ourselves run manual checks on any results by consulting original sources. The system can be told to display information that is based on two independent sources, making sure that one is not quoting from the other. We note that the quality of searches has massively improved over the last year alone. It is vastly superior to what you get from web search. And besides, Google is using AI is in its search engine too.

We heard the story that the ageing owner of an SME, which shall remain unnamed, recently told a supplier that the internet was just a phase, and would go away. We would not assume that this person would be in the vanguard of AI adoption either.

Consultants and politicians who want to peddle optimism about the German economy often tell us that there is a lot of value hidden in German SMEs in the form of unused data. We are not sure this is true. The German-inspired general data protection regulation forced companies to destroy a lot of valuable data, especially about their customers. Digital processes are used in mechanical engineering, but many companies did not curate large databases of tech data in the hope that one day this information becomes valuable.

It is a cultural thing – the same force that make Germans prefer cash over cards in their shopping. One of the most successful books in the last decade was a series of anti-tech diatribes by a psychologist, Manfred Spitzer. He published numerous bestsellers with titles such as Cybersick, Digital Dementia, and the Smartphone Epidemic. This was not a campaign to stop children to take their smartphones to school, but to stop them from learning programming. Such books may exist elsewhere too but would not top the charts.

That professor, by the way, is not an expert in computer science, but in Socioinformatics, the branch of computer science that warns of the dangers of computer science.

The Federation of German Industry (BDI) was once the single most important non-state institution in the country. The BDI president Peter Leibinger yesterday gave the bleakest assessment yet we have heard coming out of Germany. Germany's industrial economy was in economic free-fall, he said. Whereas in the rest of the EU, the cyclical crisis for industry is over, the situation in Germany is dire. There is no end in sight. Leibinger said it was the biggest crisis since the beginning of the Federal Republic.

Leibinger spoke after the publication of the latest BDI report and forecast. What makes the report so gloomy are the exceedingly low levels of capacity utilisation, especially in the chemical industry, but also in mechanical engineering and steel. These are the backbones of the German economy. The situation in construction is stabilising, whereas the car industry is increasing production - whilst simultaneously still shedding jobs. 

As ever, we see cyclical and structural effects superimposed. German industry is in structural decline - because it has lost the ability to extract oligopoly rents. China is a serious competitor in most segments, including high-quality products. The global trade environment is becoming harder, and supply chains are becoming less reliable. Leibinger called for structural reforms. While useful, we struggle to see how this would arrest the decline of the car and chemicals industries. What we see in Germany is over-reliance on two few mid-tech sectors, and a lack of diversification. Structural reforms could address these issues, for example by cutting subsidies or opening up the financial sector, but we fear that these are not the structural reforms Leibinger had in mind.

The Mediterranean region is not only rich in history, culture and natural beauty. It has been the stage for conflicts since ancient times. And it has large reserves of gas, with disputed claims of who has the right to explore them.

Those exploration rights depend crucially on maritime borders in the Mediterranean sea that neighbouring states need to agree on. They define their territorial waters, their continental shelf and what constitutes their economic rights. The legal basis for this is the United Nations Convention on the Law of the Sea (UNCLOS). This treaty does not in itself set the borders. It grants coastal states certain rights but also gives them some leeway to negotiate with their neighbouring countries on the exact delineation of their exclusive economic zone, or EEZ, an area of coastal water or territory within a certain area of a country’s coast, where it has exclusive rights for fishing, drilling and other economic activities.

Of the 22 Mediterranean countries, Turkey, Israel and Syria do not accept UNCLOS as legally binding. This leads to tensions in the region, and is also one of the reasons why energy cooperation in the region has been difficult.

Last week the governments of Cyprus and Lebanon agreed a delineation of their maritime borders that followed the median line principle of the UNCLOS convention. For Cyprus, it is the third such deal, after agreements concluded with Egypt in 2003 and Israel in 2011 to formalise their maritime borders. For Lebanon, this deal was possible after they signed a deal in 2022 with Israel. The EEZ delineation is not completely defined yet. There is no deal with Syria, while Turkey continues to reject Cyprus’ border claims, arguing that the Turkish Cypriots were sidelined. Border disputes remain, even if the zone concerned by the deal with Lebanon did not affect the Turkish continental shelf.

And it may have wider ripple effects. Turkey’s defence minister Yasar Guler warned against unilateral actions in the Aegean and Eastern Mediterranean, including the Greece-Cyprus electricity interconnection and similar energy cooperations between Cyprus and Lebanon. No project in the Aegean or Eastern Mediterranean that ignores Turkey or intends to usurp its rights will be able to take place. There are also irritations and stalling negotiations between Turkey and Greece, as Macropolis reports. Greece proposed a five-party forum with Egypt, Turkey, Cyprus and Libya to facilitate delimitation agreements in the Eastern Mediterranean but got no response.

Turkey has a unique role to play, as a major actor in Syria and the only country to acknowledge and defend the rights of Northern Cyprus as distinct from the Republic of Cyprus. Turkey also does not see itself bound by the UNclos convention, even if it is internationally considered as customary international law. In 2018 Turkey concluded a deal with Libya, which created maritime borders that cut right into the EEZ from Greece and Cyprus. This nearly led to a hot incident when Turkey started to send exploration ships into this disputed zone and blocked a drilling ship from the Italian energy company Eni in the same year, as well as other exploration attempts.

The continued dispute complicates the plans for large scale energy projects in the region, such as the EastMed pipeline, which cannot move forward without Turkey’s involvement and cooperation.