If we look at the extended cryptoverse, the parts where we see the most value in the long run are those that are decoupled from the established financial economy. By value, we mean long-term value, the value that will still be there in 20 years. In the short term, our assessment is almost surely wrong. Donald Trump himself made a lot of dollars through his memecoins. You can make a killing by investing in the right segments of the stablecoin market. Twenty years ago, people made a killing by investing in collateralised debt obligations. So everything we say here has a 20-year horizon.  

What is true today, and will still be true in 20 years, is that the stability of any financial derivative is contingent on the solvency of its underlying assets. The underlying asset that gave rise to the global financial crisis were subprime mortgages. The underlying asset that underpins stablecoins is the US dollar, and indirectly US treasuries. So what happens to stablecoins if the dollar-verse gets debased?

There is a lot of clever stuff happening in finance, but there is relatively little true innovation. Because finance is in the end about equity and credit and uncountable ways of how they are packaged.

We see the blockchain technology as true innovation because it does not lend itself to debasement through political decisions. A crypto-currency that uses the blockchain technology is supply-constrained by design, more so than gold, whose total volume still expands by some 3% per year. The inherent weakness of the stablecoin is not how it is linked to the underlying asset. If properly regulated, this link can be made as hard as we like it to be. The weakness consists of the underlying asset itself.

The West’s Achilles’ heel is rising debt. The latest is a debt-financed military expansion in Europe and Trump’s Big Beautiful Bill. The crypto innovations may well extend the administration’s technical ability to issue new debt. It may get them around regulations like debt ceilings. But debt is debt.

Subprime debt was subprime debt too. Subprime became so toxic because they were teaser mortgages that reset after a number of years. The misplaced hope was the value of the assets would have appreciated enough to allow the mortgage holders to refinance at that point. The macro equivalent of a subprime mortgage is the zero-coupon bond. Imagine if a government were to issue a zero-coupon that never expires, and then a crypto-company would use this as a security guarantee for a stablecoin?

You can think of a stablecoin as a money market fund, or as payment system that cuts the middleman. This is why Amazon, for example, is so keen on it. This is all true. But this is not how we see it. For us, a stablecoin lives in the hybrid world between money and debt. They constitute an extension of the money supply.

We are not predicting that stablecoins will crash in foreseeable time. But what we do know is that their longevity will depend on the quality of the underlying assets.

What almost everyone knows about AI is that it is power-hungry. Data centres consume an enormous amount of electricity, and are likely to be a key source of demand growth in the coming years and decades in Europe.

There is a lot of discussion over how to meet that demand by building more power generation capacity, whether through gas plants, nuclear, or renewables. There is less discussion on how this power is supposed to get from Point A to Point B, however. Electrical grids are the ugly stepsister of the energy transition. But they are a potential key constraint on data centre growth in Europe.

A recent report from Ember, an energy and climate-focused think tank, argues that constraints on grids could force data centres to diversify away from current popular spots. At the moment, the big data centre hubs in Europe are London, Dublin, Paris, Frankfurt, and Amsterdam. However, in most of these places, it has become increasingly difficult to get these centres connected to the grid. Where upgrades are necessary, they can take an extremely long amount of time – up to 13 years.

As a result, within Europe data centres might end up shifting away from these more popular locations to places where grids are less congested, easier to upgrade, or both. The report flags the Nordics and southern Europe, like Spain and Italy, in particular. It says that it expects data centre demand to grow in these locations by 110% through to 2030, compared to 55% in the traditional hubs. The report goes on to say that by 2035, on current trends half of European data centre capacity would be outside of the big hubs.

This, of course, has in and of itself a big economic impact. But it also has a possible practical one for many European households. If you connect lots of data centres to a grid that isn’t fit for purpose, you run the risk of degradations in power quality: harmonic distortions. A Bloomberg investigation last year in the US found that this phenomenon, which can degrade electric appliances like refrigerators, often correlated strongly with the presence of nearby data centres.

All of this gets even more important if you think about the big application of AI that's coming up: using it in industry. Generally speaking, AI processes fall into two categories: inference and training. Inference is when it actually does a task for a user. Training is the process of getting it to the point where it can do this using data. It is the training that is the really energy-intensive part, and industrial applications of AI involve a lot of data. 

Part of the problem with delivering upgrades is regulatory, and due to not-in-my-backyard opposition. Many of the UK’s power cables actually run underwater because, as the saying goes, fish don’t vote. Another issue is finding the funding necessary to deliver these upgrades when governments need to step in.

As our societies age, how will our economies grow? European exports have been exposed to uncertainty about supply chains, competitiveness in third markets, and Donald Trump’s tariffs. States have only limited funds available for spending. Investments have yet to take up speed, while consumption is just trundling on. Is this just a blip, or a more structural shift that is to be expected in ageing societies where less people are in the workforce and more in retirement? This is not only about intergenerational fairness, but about how economic incentives work. Those who retired are no longer in the labour market but still are to make choices over what to consume and how much.

Economic models like to predict that the closer people get to the end of their lives, the more logical it is for them to spend more rather than save. But in practice we see the opposite happening. People worry about possible health risks or that they may not have enough to provide for their lifestyle, and thus save more. General uncertainty will affect those retired more than those with options to raise money. This includes uncertainty about inflation, politics, and crises such as the pandemic. Psychologically, ageing populations are thus likely to save more rather than less. Setting tax incentives may be of little use if their underlying perception is one of precariousness.

The French statistical institute Insee found that the savings rate in France increased to a record of 18.8% of households’ disposable income, a level not reached in 45 years. Backed by data from La Banque Postale, they find that two thirds of last year’s increase in savings is from retirees. In 2024 the social benefits, including pensions, rose twice as fast as wages. But the number of savers amongst those 64 and over increased to 40% from 32% before the pandemic. All those savings will be put into the banks to earn returns rather than circulate in the economy.

The current economic policy debate looks at how to turn our economies over from export surplus countries into self-sufficient ones driven by investment and home consumers. But that does not quite take into the account of what to do in societies where precautionary savings becomes a second nature due to a change in age profile. Is this what happened in Japan?  It may happen here in Europe if people whizz off into retirement early on, unable to adapt to changing circumstances with ease. Early retirement is a blast from the past from a cold war era. In today’s world of uncertainty, our societies need more resilient strategies to keep those above retirement age engaged in the economic process.

There are, we think, two certainties about the state of the EU economy. One is that it is not doing well, and the other is that the problem is a structural one. This is especially the case amongst the large euro area countries. Growth across the board has been low since the pandemic. But in some countries, like Germany, the rot had clearly set in earlier.

Nothing ever boils down to one single cause. But we see the biggest of them being the fragmentation that still exists within the EU. It causes regulatory duplication that actually makes it harder for firms to do business, weak capital markets, higher energy prices, and issues that negate a fundamental promise of the EU: freedom of movement.

A recent IMF paper laid out where we are now in stark terms. For instance, a third of EU household financial assets are in cash, or bank deposits, versus a tenth in the US. Across the Euro area’s largest countries, between 60 and 80% of insurers’ equity holdings are in firms based in the same country as the insurer itself. As for labour mobility, 22% of EU workers work in a sector that is subject to some form of cross-border regulations. From 2017-19, only 6% of those who moved inside the EU to take another job made use of the professional qualifications recognition systems that the EU itself has put in place.

This fragmentation is also hampering us geopolitically. Uncertainty about US economic policy, and by extension the US dollar, should be an opportunity for the euro. Instead, investors have piled into gold. Here too, we have the costs of fragmentation: the lack of a single safe asset, akin to US treasuries, that could draw investors towards the euro.

We think, however, that there is a more fundamental issue. There is no shortage of recommendations out there already to do fix these problems. The IMF paper itself makes a few good ones, and we are not the only people ever to have talked about the need for a single safe asset in the euro area.

Instead, the barrier is political. Reforms to make the single market workable have proven difficult in recent years because there isn’t much of a constituency for them. If cross-border companies, or big high-tech firms that rely on venture capital, don’t exist yet, they cannot lobby for change.

Similarly, we have seen various ersatz Eurobond projects that fail to consider the fact that sovereign debt commands its status because of its sovereign character. You cannot create a sovereign bond without politics, perhaps every technocrat’s dream, because sovereignty is fundamentally political.

What if there is a G7 meeting, and nobody goes? Or when the one person who matters leaves early? What’s left from the effectively truncated G7 summit in Kananaskis, Alberta, are pictures of European leaders huddled on a sofa. Giorgia Meloni did her famous eye roll. Keir Starmer had this concerned look on his face again. Merz’s meeting with Donald Trump resulted in another open exchange of views with Trump on Ukraine – and we all know what that means. The Europeans outnumber everyone in those meetings, and yet they are the ones who matter the least. Trump is, of course, right that without Putin, and Xi Jinping, there is no point in having meaningful meetings in 21st century geopolitics. A German newspaper struggled to explain that Trump’s early departure was not intended as an affront against the G7. He really had to go because he was about to do something very important in Iran.

Maybe he will. Maybe, he won’t. Trump mocked Emmanuel Macron for suggesting that we worked on a cease fire. “Emmanuel always gets it wrong,” were his parting words. Whatever Trump does, he will not have coordinated this with any of the characters present.

Another European in denial of Europe’s decline is Christine Lagarde, who wrote an article to hail what she sees as a global euro moment. There was a chance once that this would happen – between 1999 and the global financial crisis. It did not happen because of the policies the EU agreed during the financial crisis years – like the re-nationalisation of banking, which goes under the headline of banking union. Real leadership is about actions, not words or symbols. Real leaders talk to other leaders, not about them, as we do in Europe.

We saw a small news item in the German press that will not normally make big headlines, but it is indicative of how the German economy works, and indicator of why reform will be hard. Bild, an ardent advocate of the re-introduction of the general draft, enlisted the support of some of top leaders of the German business lobbies for its campaign. One would assume that the business lobbies would not want to push for it because the negative effects a draft would have on labour supply. It would mean that an entire year group of young – those who become 18 at some time in the next two or three years - would no longer enter the labour force but spend a year in the army.

Unlike in the 1970s and 1980s when the draft was in place, the German economy is suffering from skills and labour supply shortages. After the failure of an experiment to reduce the number of school years from 13 to 12, federal states are now going back to 13. Together the two effects will mean that the effective entry age into the labour market will go from 18 years to 20 years. This will be a massive reduction in the labour supply to coincide with a demographic shock.

The only explanation we have for business lobby to act against the interests of its members is that in Germany big business, and the lobbies in particular, regard themselves as part of the government. It is a communitarian, corporatist world. If you run a start-up company, you want a supply of talented young people. You might not get what you want. That’s life. But you would be hopping mad to pay for a lobbyist to speak out in favour of a supply constraint.

So this is where we see the main dividing line in the German economic debate going forward - not between the left and the right, the trade unions and the employer associations – but between the corporatist world and the next generation.

There is an old joke about European integration: the only thing that is worse than the Germans failing to lead in Europe, are Germans leading in Europe. The most successful things the EU ever did – the single market for example, or the launch of Airbus – were projects in which Germany participated. But they were not German-led projects. The stability pact, the Green deal, and austerity in the last decade were Germany-led projects.

Under Friedrich Merz, re-militarisation is promising to become the latest doomed German-led initiative, not because it is wrong in principle, but because of how it’s done. The main problem with German defence spending, and European defence spending in general, is not the supposed lack of it, but a level of inefficiency that is unmatched anywhere. Here is one concrete example: Germany ordered 68000 high-explosive ammunition from a French defence company to be delivered to Ukraine at a cost of €4000 for a single artillery shell. The Russians can do this for under €1000. If your inefficiency is that massive, spending more money is the worst thing you can do.

We have written about the duplication of weapons systems before. The inefficiency also pertains to staffing. The metric of this inefficiency is the enthusiasm with which European countries are embracing the general draft despite the fact that we are not at war. As Handelsblatt reports this morning, Germany is the latest country to consider the reintroduction of the general draft after the defence ministry made a proposal to start off with a voluntary, following by a compulsory one if the voluntary schemes fails. Boris Pistorius is effectively trying to overturn his party, the SPD's, veto on this issue.

The problem with bad decisions is that they lead to other bad decisions. A general draft becomes necessary when you are overpaying for your gear, and you are underpaying your staff. A corporal in the German army with about seven years of experience earns about €3000 a month, whereas the corresponding US salary is more than twice as high. This is a European problem as much as it is a German one.  

It is natural for countries to discuss an increase in their defence capabilities if they feel under threat. But any serious discussion should start with what capabilities are needed and how to achieve them in the fastest and most cost-effective way. If Nato-Europe cannot even bring itself to move towards joint defence procurement, we should not be surprised to hear that Vladimir Putin is seriously considering testing whether the Nato Art. 5 security guarantee would hold in practice. If we Europeans wanted to impress on him that such a test is a really bad idea, the last thing we should do is to formulate defence spending targets that can only be achieved through higher debt and that are unlikely to be supported by the public beyond an initial phase of enthusiasm. Remember what happened to the Green deal.

The discussion about the re-introduction of the draft in Germany will be very bitter. The Social Democrats oppose it but the current leadership will probably go along with it. CDU/CSU and AfD support it strongly, along with the Greens who call it a freedom service. Germany formally abolished the draft in 2011, but it had already lost much of its bite since the end of the Cold War. We have a generation of people who did not serve in the army telling a younger generation to sacrifice a year of their lives to serve in an ill-equipped army.

This is just a short story to pick up on a point made by Jens Weidmann, the former Bundesbank president and supervisory board chairman of Commerzbank. Weidmann said the merger would constitute a mutualisation of debt in Europe. He is clearly not a neutral source. But the comment highlights an important German take-away from the sovereign debt crisis. Germany has lost all appetite for turning the euro into a functioning monetary union.

We note that quite a number of people in our wider community are starting to panic about the euro area, and are calling for a eurobond, and a capital markets union, to be introduced right now. The euro crisis was the moment to have done that. We all know that the politicians did not end it. What ended it was Mario Draghi’s central bank backstop. Weidmann clearly understood that too. He consistently voted against all backstops, and any balance sheet policies.

Draghi did indeed save the euro area at the time. But it came at a price. It reinforced the sovereign-bank nexus. We recall the image at the time of two drunks walking through town at night propping each other up. They have sobered up a bit, but they still prop each other up.

There is the Irish joke of somebody saying when asked for a direction: I would not start from here. That’s the problem with all the ideas of further integration of the euro area. Of course, it would be great to have a capital markets union. But not with these banks. There is much toxicity left in European sovereign debt markets and the banking system that has hidden them from view. Why would Italian sovereign debt carry such a low spread, when underlying economic growth is as non-existent as it was during Italy’s 25 year-membership of the euro area? At 0 growth, and 135% debt-to-GDP Italy would not be sustainable in the euro area without Italy’s banks. All the toxicity in the Italian banking system dates back to that fateful moment in 2012, when the euro area solved its problems through the central bank’s balance sheet.

We are not saying that Weidmann is right. But we are not surprised to hear this argument. And it will be made again and again. We, too, would not start from here.

In politics, narratives emerge as a result of timing. Donald Trump compared the Russia-Ukraine war with two children fighting with each other. Then he got into a spat himself with Elon Musk.

Emmanuel Macron had his own misfortunes with timing this week. Over the weekend, he criticised the public focus on violence, drama, and on what goes wrong rather than on what can be done to do better. Yesterday his comments met reality. A middle school student fatally stabbed a supervisor when she wanted to inspect his bag in Nogent, a small town in France. On the same day, Austria had its first school massacre in Graz with 10 killed and 12 injured.

Macron built his success on an impeccable sense of timing. He just knew when to speak, when to remain silent, when to act or delay, when to expose or protect. But since the dissolution of parliament last year, Macron's timing is increasingly off. He jumps from one theme to another, none with sufficient support to carry it into another day, be it on children’s rights, referendums or his positions on Israel and Palestine. The long interventions on television are anchored in the past to defend his record, but lack vision for the future. His hesitation over Michel Barnier as prime minister and now his estranged relation to Francois Bayrou do not give the impression of a president who knows what he is doing.

The brainwashing comment over the weekend was another example of talking down risks and yet not having the power to do anything to change it. In response to what happened in Nogent, Macron promised to ban social media for those under-15s. He stood by his earlier comments, highlighting the influence of certain journalists in forging public opinion. He said what happened in Nogent, happened. Very much unlike Marine Le Pen and other politicians, who openly talk about the horror and savagery in Nogent. For Macron, what counts is the response that follows.

What a contrast to Austria, where Chancellor Christian Stocker talked about a national tragedy, ordering three days of national mourning. A school needs to remain a place of peace, Stocker insisted.

As people plough through the over 1000 pages of the Big, Ugly Bill that is currently in the US Senate, they find that the Trump administration sneaked in stuff that normally does not belong in a budget bill. In this case it is a 10-year moratorium on AI regulation by the states. The reason, its defenders argue, is that the US does not want to end with EU-style regulation that kills the industry.

The reason it is in the budget bill is the extension of a $500bn programme to modernise the US information technology infrastructure with the help of AI and other automation technologies. As part of this finance appropriation passage, a 10-year moratorium on regulation is imposed on the states that prohibits them to pass regulation to restrict artificial intelligence models, system or automated systems that affect inter-state commerce. There have been 1000 AI regulatory proposals issued in the US this year alone. If this continues the US would end up with an AI development very similar to what happened in the EU.

Historically, innovation happens first, and regulation usually comes after a time delay. The car came before the Highway Code. The purpose of good regulation is not to protect consumers or frustrate business, as has been the case in the EU, but to ensure level-playing conditions in markets – both between companies, and between companies and consumers.

Regulatory fragmentation is an issue in both the US and the EU. EU member states have gold-plated internal market legislation, leading to increasing fragmentation, and in parts, over-regulation. Very few people who express views on AI, often negative views, have a truly deep understanding of how it works, and how it affects the economy. What makes AI distinct from other digital technologies is that the big economic benefits accrue to users more than producers. AI has been developing in many different directions – large language models are most familiar, but not the most important. Robotics is going to have a far bigger impact on the economy than ChatGPT. AI, like other high-tech before, has important applications for the military and the health services. This is not a technology you wanted to keep outside your door.