Weakened NATO

Europe's Immense Security Challenges in the Age of Trump

The trans-Atlantic alliance has been significantly weakened, forcing Europe to build up its own security structures without inflicting even more damage on NATO. Is such a thing even posible?

By Christiane Hoffmann

Photo Gallery: A Murky Future for NATO


The timing of the article could hardly have been better. On Feb. 12, just three days before the beginning of last weekend's Munich Security Conference, it was published on the website of the U.S. magazine National Interest. And it quickly became a topic of fevered discussion among conference participants, particularly those from Europe. "Dump NATO," blared the headline.

The piece wasn't written by a no-name. Its author is Christian Whiton, a former State Department adviser during the administrations of both President George W. Bush and Donald Trump. His central message in the piece is that the United States should back out of NATO. The sooner the better.

"A rich continent with a $17 trillion economy -- more than 10 times the size of Russia's -- does not need America to underwrite its defense," he writes. NATO, Whiton believes, "is little more than a mechanism for Old Europe to freeload off of America."

Freeload. That's the tone in which the entire article is written. It is both hostile and scornful in the extreme. And along with NATO, Whiton also throws the entire canon of Western values onto the trash heap of history. "Most of the countries in Old Europe have chosen atheism, globalism, multiculturalism and decadent decline," he writes. "What exactly are we defending?"

In normal times, it would be simple to just dismiss the "Dump NATO" article as the ramblings of a fringe lunatic -- as a provocation or aberration that has little to do with reality. But not these days. Not in an era in which Whiton's article likely reflects exactly what the American president is thinking.

Piling On the Pressure

Donald Trump has publicly called the Western defensive alliance into question on several occasions and has reportedly discussed with his advisers whether the U.S. should simply withdraw from NATO entirely. According to participants in those discussions quoted by the New York Times, he doesn't see the point of the alliance. Not only that, but he orders European countries around as though they were his subordinates, he piles on the pressure and he carries out secret talks with Russian President Vladimir Putin.

To be sure, Trump has not thus far taken any military steps that have actually harmed NATO in any way. In fact, the Americans have bolstered their military presence in Europe, a fact that Europeans at the Munich Security Conference turned to for comfort.

But when it comes to security, words are the equivalent of deeds. Guarantees of security are only worth something if they apply unconditionally and are not attached to an expiration date. That has thus far been the foundation of NATO. If the U.S. president calls the American nuclear shield for Europe into question, then Europe is no longer secure. "Despite our public proclamations, no reasonable person believes that Trump would sacrifice Seattle for Riga," said a senior German diplomat in Munich.

NATO has protected Germany for 70 years, the anniversary is to be celebrated this December in Washington, D.C. But the event could ultimately be reminiscent of the 40th anniversary of East Germany, which was observed in October 1989, just weeks before the fall of the Berlin Wall. The structures still exist, but they have become fragile and basically everyone has come to realize that they are no longer stable.

The problem, though, is that Germany is dependent on NATO. Indeed, all of Europe is militarily dependent on the U.S., both on America's conventional armed forces and on its nuclear capabilities. And for the foreseeable future, there is no alternative to the alliance that might be able to guarantee Europe's security. That is the uncomfortable truth Europe currently finds itself facing.

"Very, Very, Very Serious"

"NATO still exists, but the alliance hardly exists anymore," says French political scientist François Heisbourg. He says the relationship is similar to that between the church and religion: The church is still standing, but faith has evaporated. "A church without religion loses its mission," he warns. The situation, he adds, is "very, very, very serious."

Security is a complex matter and relies on a mixture of hardware and soft power, threat and dialogue, propaganda and psychology. And complexity breeds competing viewpoints. "Everything is interaction," German Chancellor Angela Merkel said in her Munich speech, quoting from Alexander von Humboldt.

Germany needs NATO but can no longer depend on it as much as it could in the past. That means that Germany must reexamine its national security; not doing so would be the height of negligence. But what exactly does that mean? How is it possible to think beyond NATO without accelerating its collapse? How can Europeans develop their own, stronger security structures without weakening NATO?

"The structures in which we operate," said Merkel, "are essentially those that emerged from the horrors of the Second World War and National Socialism." These structures, though, she said, are now coming under intense pressure. Reform, she insisted, is necessary, but "I don't think that we can simply take an axe to these structures."

More than two years ago, the EU set forth the goal of "strategic autonomy." In Washington, however, the initiative was met with suspicion rather than enthusiasm. Now, Europe is faced with the reality that every step it takes toward security autonomy could give Donald Trump an excuse for saying: You don't need us anymore.

It is an immense project, and it will take a long time: Europe must massively upgrade its conventional forces and take a closer look at its nuclear deterrence capabilities. It must push the Germans and others to spend more on defense and it must clarify what future role the British will play in security. It must figure out how to protect Eastern Europe, develop its own relationship with Russia and grapple with cyber threats, hybrid warfare and autonomous weapons systems. And Europe must truly unite.

But as difficult as that may sound, there is no other way. Europe is at the very beginning of the process -- and anyone who claims to have a solution to the immense issues facing the Continent is a con artist.

Extremely Unpopular

Still, the debate, the rethinking, the recognition that we are now living in a different world -- all of that must start immediately. In Germany, the discussion hasn't yet begun because the country's politicians are afraid of it. The message that our security is no longer guaranteed and that we have to do much more ourselves is one that is extremely unpopular.

Instead, the discussion has been massively restricted to the question as to whether Germany should increase its defense spending to 2 percent of gross domestic product, in accordance with the NATO resolution reached in Wales in 2014. How great would it be if our security problems could be solved so easily, with just a bit more spending?

Germany is completely unprepared for the new era. The country has not yet bid farewell to the mental comfort zone that emerged at the end of the Cold War, when threats appeared to evaporate almost overnight. Now, a realistic understanding of danger is altogether absent. For almost a quarter century, the Germans have been debating whether it should participate in overseas deployments, and if so, which ones. The fact that the country's own security could now be at stake is a realization that has yet to hit home.

NATO, too, has shied away from taking a sober look at the future, perhaps understandably so. There is widespread unease at NATO headquarters in Brussels, with some in Munich even saying that certain subjects cannot even be broached. "We can't even address the necessary questions internally," said one NATO insider. "We're not allowed to talk about them because otherwise we'll be accused of calling NATO into question."

"Two years ago, when representatives from the Trump administration appeared at the Security Conference for the first time, we were in a period of denial," says François Heisbourg. But times have changed. "We are living in a different era."

Power Centers

To explain the global situation in this new era, Markus Ederer needs a number of props. The diplomat is standing in the lobby of the luxury Munich hotel Bayerischer Hof and digging in his coat pocket. First, he pulls out his two mobile phones and sets them on the poseur table in front of him. The phones represent the U.S. and China, the two power centers -- both economically and militarily -- of this new world order.

The pen in between is Europe. "It's an unpleasant middle position," says Ederer.

He moves the ballpoint pen back and forth between the American and Chinese mobile phones. "China and America are both trying to claim us for their own agenda," he says. "Europe must position itself." The pen remains above the two mobile phones: "It's not an equilateral triangle -- it's closer to the U.S."

Ederer reaches back into his jacket pocket and replaces the ballpoint pen with his diplomatic passport. The passport is now Europe, the pen an axis. He pushes it back and forth -- the NATO axis between Europe and the U.S. Or the trade axis between Europe and China.

Ederer is used to thinking in terms of axes, of big strokes and long periods of time and of scenarios for the future. He spent years as the head of the planning staff at the German Foreign Ministry and later as a state secretary. He's currently serving as the European Union's ambassador to Moscow.

Russia, he says, is also in a middle position. He takes off his conference badge and sets it down right next to the Chinese mobile phone: "Russia is very close to China. We in Europe must not resign ourselves to this in the long term."

In Ederer's world on the table, the only role left for NATO is a subordinate one. The world in which NATO once functioned no longer exists. And the truth is that Trump has played only a marginal role in this development. As such, it is misguided to think that everything might return to the way they used to be once Trump's tenure has ended.

The End of the Trans-Atlantic Era

The trans-Atlantic era will not return, despite assurances in Munich by former Vice President Joe Biden that: "We will be back!" In the future, the competition between the two mobile phones will determine the world's fate, and the U.S. will view Europe in terms of whether it is a help or a hindrance in its competition with China.

For Europe, that means it must begin thinking about the "post-Alliance era," as François Heisbourg describes it. The good news is that the first indications of such considerations could be seen in Munich, even though most of the speeches given were still filled with clichés about trans-Atlantic loyalty.

There are a number of considerations that follow from the changing reality. First off, if the Americans continue backing away from their role in NATO, their European allies may one day find themselves all alone with Russia. That potential outcome necessitates a redefinition of Europe's relationship with Russia to one that is more independent from the U.S. On the one hand, Europe must better arm itself against possible Russian aggression, which primarily means protecting the countries located between Germany and Russia, such as Poland and the Baltic states.

These counties are particularly concerned about America's shrinking commitment to the alliance, particularly given that Russia is likely to station a larger number of land-based, medium-range missiles following the foreseeable end of the INF Treaty. The leading candidate of the European People's Party for the European elections, CSU politician Manfred Weber, made a proposal in Munich aimed at showing East Central Europeans that the rest of Europe is serious about protecting them.

Germany, Weber suggested, could propose setting up a joint missile defense system together with the Central/Eastern Europeans. That would provide credible protection and could even form the core of a genuine European defense union.

Not Defenseless Against Russia

Even without the U.S., Europe is not defenseless against Russia. Its military expenditures in recent years have been around four times higher than Russia's. "A major conflict, even one with nuclear weapons, would not be possible for Europe without America's help," says political scientist Constanze Stelzenmüller of the Brookings Institution in Washington. "But Europeans should be able to manage smaller to medium-sized conflicts on Europe's periphery themselves." At the same time, the new global situation could also make improving European relations with Russia easier in the longer term.

Russian foreign policy veteran Sergey Karaganov has spent more than 30 years advising Russian governments and the Kremlin, and his striking bald pate is a presence at almost every conference focused on security. In recent years, Karaganov has warned repeatedly that Russia, repelled by the West, is in the process of reorienting itself eastward.

Last weekend, he could be found sitting at the bar in the Bayerischer Hof hotel lavishing praise on Europe. "We are ready to connect culturally and economically with Europe as a junior partner," he says. "The Russians love Europe -- they're more European than the Europeans."

Does that also apply to security policy? "NATO and the OSCE are dead," Karaganov argues. "The old institutions are like ruins that only stand in the way." Karaganov proposes a security dialogue between Russia and Europe, with cooperation in concrete areas like cyber security or migration. "Russia and Europe have mutual interests and face common threats," he says. "Even if it seems very far-fetched now, they could one day work together on security issues."

'A Guest Room for the Americans'

A second consideration is that of Europeanizing NATO. Supporters of this line of thinking believe that the NATO apparatus in Brussels actually works well enough and argue that there is more to NATO than just Article 5. Rather, it is a gigantic defense bureaucracy that functions wonderfully on the technical-operational level. The church, in other words, is still standing. It is up to Europe, according to this line of thinking, to fill it with a new faith.

If the Americans wanted to get rid of NATO, the Europeans could just take over the building. "The EU could use this functioning structure, even without the Americans," says François Heisbourg.

"It could be that NATO will become a structure for European defense," says Stelzenmüller, "with a guest room for the Americans."

The third consideration revolves around Franco-German relations. It is, in fact, the prerequisite, because European defense can only work if Germany and France work much more closely together.

A Grand Bargain

Chancellor Merkel positioned herself surprisingly clearly in Munich on a first controversial issue: arms exports. She advocated for a "common culture of arms exports" because it is the prerequisite for joint arms projects. That's also why the Germans have gone a long way toward accommodating the French in a secret supplementary agreement to the Franco-German partnership treaty signed in Aachen this month.

That agreement needs to set an example: Germany and France must finally begin tackling issues on which they have divergent views for historical and cultural reasons. They need to find compromises, which also means that the Germans will have to make concessions, including some painful ones. "Cooperation between France and Germany doesn't work because we agree on things," says Heisbourg, "but because we are able to reach agreements."

Germany and France could agree on a grand bargain that puts everything on the table. Germany would have to show some movement on arms exports and limit parliament's ability to impose restrictions while France would have to Europeanize its permanent seat on the UN Security Council. The issue of France's nuclear weapons, the force de frappe, would also need to be addressed.

"I think Paris would be willing to discuss a common nuclear deterrent," says Heisbourg. Many decades ago, at the NATO summit in Ottawa in 1974, France already agreed that its nuclear arsenal was part of Europe's common defense. As such, the idea that the force de frappe isn't exclusively there to protect France is not a new one. Still, it is a far cry from Russia's nuclear arsenal.

For Heisbourg, though, one thing is clear. "The idea that the French would expand their nuclear shield and the Germans would pay for it will not work," he says. "This can't be a mercenary relationship. Nuclear deterrence is existential -- you can't buy it." Once again, that means that Germany will have to become more engaged militarily.

It sounds completely unrealistic: a European nuclear shield; a NATO in which the Americans are only guests; a European army deployable by the European Parliament; arms exports conducted according to rules that don't necessarily correspond with Germany's ideas of a values-based foreign policy; and much greater German commitment. But perhaps that's just how it is when a new era begins.

Who would have once thought that Germany would ever give up the deutsche mark? We are living in a time when the impossible not only needs to be conceivable, but also attempted.


The global centre

The story of China’s economy as told through the world’s biggest building

It is a microcosm that reveals how much China is master of its own fate




1 The global centre

THE WORLD’S biggest building got off to a bad start. On the eve of its opening, Deng Hong, the man who built the mall-and-office complex, disappeared.

For years Mr Deng had received tributes in local media for turning farmland into glistening conference centres and hotels. The billionaire “conference king” walked with a swagger, chomped on cigars and knew how to please officials. Hefty contracts rolled his way, including one to develop a landmark in the suburbs of Chengdu, a city of 14m in south-western China. This, the New Century Global Centre, was to be his crowning accomplishment, the world’s largest structure by floor space, the size of 246 football fields, or nearly three Pentagons or eight Louvres.

But then he was gone, swept up in a corruption investigation just before the building’s doors opened in 2013. The media focus shifted to his hubris and his wasteful, pharaonic venture. Inside, it had a massive waterpark with an artificial beach, an ice rink, a 15-screen cinema, a 1,000-room hotel, offices galore, two supersized malls and its own fire brigade, but just a smattering of businesses and shoppers. It became a parable for the economy’s excesses and over-reliance on debt.

Today, more than five years on, the story has taken a series of surprising turns. For one, the building is not a disaster. During the summer, the waterpark is crowded. The mall has come to life, a testament to the rise of the middle class. The offices are a cauldron of activity: 30,000 people work there in every industry imaginable, from app design to veterinary care. Mr Deng has been released and is back in business, declaring last summer that he had a clean slate.

A triumphant return? Not quite. Mr Deng’s freedom is marred by the fact that he no longer owns the centre but is now an employee. It was bought by an arm of the state—a transaction that regulators are probing for financial irregularities. From one angle the world’s biggest building seems to be thriving; from another it is once again under a cloud.

Discussions on China’s economic future also tend to swing between two extremes. At one end of the spectrum, it is seen as an unstoppable juggernaut, destined to dominate the 21st century. At the other end is the conviction that a crash is inevitable. The trade war with America has achieved the improbable feat of bringing these views together, reflecting both a fear that China must be confronted before it is too strong and a desire to hasten its collapse.

The Global Centre—the tale of its construction, its occupants and its evolution—hints at a different future. It is neither a spectacular success nor a catastrophic failure but a long economic struggle, a contest between China’s tremendous potential and the cracks in its foundations. America is only a secondary player in the drama. China, for better and for worse, is writing its own story.

In the middle of the kingdom

The centre is now surrounded by broad roads and tall buildings. But for years the land it sits on was home to the fields of Huang Fenyu, a stout woman in her 50s, and the few thousand residents of Yumin village. Many lived by timeless rural rhythms, sowing rice in the spring and harvesting green stalks in the autumn.

In 2005 those rhythms came to a halt. Chengdu officials ordered the people of Yumin to relocate to high-rise housing a short drive away. It offered each one 35 square metres (377 square feet) of floor space and as much as 8,000 yuan (then $1,000), or two years’ income. Razed of the last vestiges of its former life—narrow lanes, rice paddies, cheap bungalows—Yumin village was renamed GX92 (211/252), an 80-hectare (200-acre) land parcel to the city’s south. In September 2008, it was sold for 480m yuan to Mr Deng’s company, the Exhibition and Travel Group.

Ms Huang now works as a janitor in a nearby bank. She knows the compensation she received was paltry. The one time she went to the Global Centre for dinner, it cost her two days’ salary. “My heart ached,” she says. Even so, she is not bitter. Her new home has better plumbing and sturdier walls. The younger generation will, she says, benefit from a stronger economy. It is a quiet optimism that remains typical of modern China. Though nearly 5km from where she lives, the Centre is so big that it looks as if it is just down the street, its wavy roof outlined with neon lights at night.

Yumin village’s transformation—the conversion of farms into a construction site—has been replicated all over China. It provides the most basic answer to the question of how the economy has grown so fast. Officially, the government dates its “reform and opening” period to 1978. Yet for the first 15 years progress was uneven. Gradually unshackled from central planning, the Chinese people showed their entrepreneurial flair. But the Communist Party was divided on the critical issue of how to build the roads, homes and factories that it sorely needed—how, in the jargon of economists, to accumulate the physical capital that fuels growth.

It was only in the 1990s that China settled on a model that has, in many respects, persisted to this day. It started evaluating local officials by how quickly the economy grew under their watch. They, in turn, competed with each other to woo firms, offering them cheap land, tax breaks and low-cost labour. Transforming the bureaucracy into something more like a large startup business, hungry to expand, yielded dramatic results. China accounted for 4% of the global economy in 1990; now that is close to 18%.

Built on sand?

Three factors have underpinned this model. Each can be found in the origins of the Global Centre. The first is land, all of which is publicly owned. This puts a valuable asset at the disposal of local officials. They can offer cheap long-term rents to attract businesses or sell big leaseholds to developers. As long as growth continues, this is sound economic logic. Developers buy up land, assuming, mostly correctly, that they can sell what they build. For local governments it is a source of wealth. In Sichuan province, of which Chengdu is the capital, land sales bring in nearly as much as taxes.

A second feature of China’s economy is cronyism. Mr Deng bought the land in 2008 at a steep discount, according to state media. The city government had supposedly attached strict conditions to the sale. He was to build an arts centre as well as a landscaped park. A mall-and-office complex was not part of the plan. Yet today the only building on the site is the Global Centre.

Officials must have known. The city government is across the street. At the time Chengdu’s Communist Party chief was Li Chuncheng. His given name means “spring city”, but locals dubbed him Chaicheng, or “demolish the city”. Mr Deng got close to him: when Mr Li wanted a relative’s remains moved somewhere with better feng shui, Mr Deng made the arrangements.

Mr Li’s fortunes turned soon after Xi Jinping came to power in 2013. Jailed for graft related to construction, he is one of the dozens of high-flying local leaders cut down by Mr Xi’s anti-corruption campaign. Mr Deng himself was detained but never publicly charged. The official line is that he was asked to “assist an investigation”, a euphemism for helping the party net a bigger fish.

Still, Mr Li’s downfall offers a window into the nexus between government and business. Local officials can dole out contracts in exchange for benefits, like covering their children’s tuition overseas or buying homes for their relatives. The path is then clear for projects that in other countries would be almost inconceivable.

The third feature in China’s model is debt (see chart). Mr Deng bought the land in 2008 just as the country embarked on a manic phase of growth. Worried about drag from the global financial crisis, Beijing unleashed a huge stimulus. Local officials ran up debts, and seized lots of land for development. A building boom ensued.
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The Global Centre is one of the many projects from that period that dot the country. Some are useful, such as China’s high-speed rail network. Others, less so: scores of cities built big futuristic districts but are still struggling to attract residents. China’s total debt soared from about 150% of GDP in 2008 to more than 250% today. Rapid increases of this magnitude have presaged financial trouble elsewhere, from the banking crises that ripped through the West a decade ago to Japan’s stagnation in the 1990s.

Yet the striking thing about these three factors in China’s economic system is that they were all useful until recently. The government’s control of land gave it a lever to kick-start investment. Land also played an overlooked role in governance, says Michael Song, an economist at the Chinese University of Hong Kong. In a large country with a lack of accountability, it functioned as a disciplining tool. To raise the value of land, officials had to invest in infrastructure, from highways to power grids. If they did not, they would have a harder time selling land in the future.

Many economists also believe that corruption was, counterintuitively, a lubricant. Emerging from the Maoist era, a little graft gave officials an incentive to do what was needed to support growth, whether in selling state assets or enticing firms to invest.


Debt also greased the wheels. Up to a point, the increase in borrowing is a sign that the financial system is operating as it should, channelling savings into investment. Virtually all developed economies have debt levels that are at least as high as China’s, albeit mostly built up over longer periods.

The challenge now is to shift to a different economic model, because all three factors are hitting their limits. Land is a finite resource, and the government’s appropriations have got ahead of market need. Gan Li of Chengdu’s Southwestern University of Finance and Economics estimates that 65m homes—21% of urban housing stock—are vacant. Corruption has reached corrosive levels. Frailties from all the debt are showing. Corporate-bond defaults in 2018 reached $18bn, more than triple the previous annual record.

But turning onto a new path is hard. Local governments cannot easily find revenue sources as bountiful as land. The anti-graft campaign has sapped the motivation of officials while leaving the rotten system around them intact. Efforts to tame debt have also hurt growth, forcing regulators to ease up in recent months. China’s problems are simple enough to diagnose. Treatment, though, is painful, and the disease more chronic than acute. So instead of taking bitter medicine, officials hope time will be a balm. But China’s ills are likely to get harder to cure.

2 The billionaire Factory

Consumption is booming, but so is inequality

IF THE LESSONS from the Global Centre’s construction seem gloomy, counter that with some time inside it. Here, China’s commercial promise is almost palpable. From the main entrance, visitors walk into a cavernous atrium which mixes high-end touches with a fairground atmosphere. The glossy marble floor is flanked by long gold-trimmed escalators. To the left is one large mall; to the right another. Straight ahead is the waterpark, under the glare of an ultra-long LED screen, projecting seaside scenes.
























The park’s main attraction is a wave pool (pictured), which generates huge artificial swells. On a summer’s day, it is raucous. Hundreds of bathers are in the surf, many with mobile phones in plastic pouches hung around their necks. Pulsating music is blasted at top volume as dancers in bikinis take to elevated platforms.

One father, Zhang Meng, sits in the waterside food court, his belly spilling over his trunks as his four-year-old son licks chocolate sauce off a dessert plate. An ad salesman for a media company, Mr Zhang has money to spend but is far from rich. When the waterpark started selling annual passes at just 700 yuan ($104) for an adult, he jumped at the offer. Twice a month in the summer he brings his wife and son. They stroll around the mall, go for a swim and dine on spicy dumplings. “We love the environment,” he says. Squint a little, and it could be Coney Island or Blackpool in the 1950s, albeit with digital touches under a vaulted glass roof.

This scene underscores the long-awaited emergence of Chinese consumerism. China’s economy is often described as unbalanced. Investment accounts for nearly half of GDP, more than double the level of developed economies. Consumption, meanwhile, accounts for about a third of GDP, half the level of developed economies. Yet a simple emphasis on these two ratios misses something important, argues Arthur Kroeber, founder of Dragonomics, a China-focused research firm. Consumption has such a low share of GDP in China not because people are staying away from shops but because its investment has been unusually large.

Looked at from a different vantage, consumption is already booming in China. Between 1990 and 2017, consumer spending per person rose nearly eightfold in inflation-adjusted terms, more than double the increase in India. China is the world’s biggest market for passenger cars, smartphones, luxury goods and beer. This is not a country of repressed shoppers.

The pressing concern is, therefore, not whether China can rebalance towards consumption but whether its spending boom can be sustained. In recent months much ink has been spilled over the idea that China might be cutting back on consumption. Evidence is patchy at best. Car sales fell sharply in 2018, but that was partly because a tax benefit was eliminated. Retail sales, more broadly defined, remain strong.

Obviously Chinese consumers cannot defy the laws of gravity. If the economy were to slump into a recession, household spending power would, inevitably, suffer. Yet there is also reason to think that, short of that, consumption in China will be resilient.

Big trends work in its favour. Over the past few years the labour force has started shrinking, which has pushed up wages. Low-end factories are moving abroad. For consumption this is an unalloyed positive. When workers earn more, they can also spend more. Household consumption bottomed out with a 36% share of GDP in 2010, when construction of the Global Centre was in full swing. This year it is on track to reach 40%.

Income levels have reached about $5,000 per person in cities, a level at which discretionary spending has taken off in other countries. The fact that the Global Centre was built in Chengdu, far inland, illustrates the strength of this trend. It is poorer than the coast, but big hubs of prosperity have nevertheless emerged. Chengdu’s economy has quadrupled over the past decade.

Everyone wants to be bourgeois now

Estimates of the size of China’s middle class vary from 100m to 600m, depending on how it is measured. Precise estimates are beside the point. What matters is the direction of travel. Consumer numbers are destined only to grow. Even in an age of e-commerce, people flock to malls like the Global Centre. Along with the usual array of clothing stores and jewellery shops, there are toddlers’ play centres, virtual-reality arcades and cosplay cafés. On weekday evenings people queue outside restaurants on the top floor.

But there is a darker side to China’s rise as a consumer society: its yawning inequality. Most countries that undergo rapid growth experience rising wealth gaps. In China this natural tendency has been exacerbated by the state’s control over where people can live. The government gifted urban residents their homes in the late 1990s when property was privatised. Those in rural areas had no such luck. Moreover, the hukou residency system makes it difficult for rural citizens to settle in cities. They are barred from certain jobs and their children are sidelined in the schooling system.

When the post-Mao era began, Chinese were poor but equal. The income gap rose sharply from the 1990s. It is among the world’s most unequal countries today, with the richest 1% holding one third of all household assets. China has more billionaires than America, even though its income per head is just one-fifth. For those on the bottom rungs of the Chinese income ladder, climbing up it has long been a motivation, but it is getting harder.

Yang Fanji and her family run a restaurant on a dusty street near the Global Centre. They deliver about 80 takeaway meals every day to its office workers. Ms Yang (not her real name) used to work at an electronics factory on the coast for better pay, but returned to Chengdu, just four hours from her home village, so that her eight-year-old son could live with her. She was able to get him into a local school by pulling some strings. But with a low wage and high living costs, she is unable to save much, making her part of a large and seemingly permanent urban underclass.

In fact there is much China could do for those like Ms Yang if it truly wanted to reduce inequality. For a start, it could make it easier for those born in rural areas to move to cities. It has, over the past decade, built up a social-security system that gives almost all citizens health insurance and old-age pensions. But payments are meagre. As ageing accelerates, the burden will only increase.

Tax reforms would also help. The government does not tax the investment earnings and property of the rich, which are basic revenue sources in developed economies. Officials seem more fearful of angering rich urbanites than of neglecting poor farmers.

In a provocative article in 2017, Barry Naughton, an economist at the University of California, San Diego, asked whether China was a socialist country. In some respects, he ventured, it was: the government can exercise much more control than is normal in a capitalist system. But on the key question of what it does with that power, he concluded that China was decidedly non-socialist. Redistribution policies have been conspicuous failures.

The number of shoppers splashing in the Global Centre’s waterpark or splurging in its restaurants will continue to rise. But the other part of the population, those on the outside looking in, scrubbing dishes late into the night after a long day serving its workers, also looks firmly entrenched. It is not a happy picture.

3 Means of production

The market is under increasing pressure from the state

CROWDS START arriving at the Global Centre before nine in the morning every weekday, well before the shops open. They are the 30,000 people who work in the offices on its upper floors. These contain a motley mix of companies, 1,800 in all—a rough cross-section of China’s business world.

Some, like Huodongjia, would be at home in Silicon Valley. Its main product is an app for conference listings. Wang Qing, its founder, clad in skateboarder shoes and shorts, is refreshingly frank about the headaches of tech entrepreneurs in China. There’s too much short-termism, he says. “The mentality for investors is, if I give you 10 yuan today, you’ve got to give me 11 back tomorrow.”























Other offices are starkly different. At the Quanxing law firm, Fu Shaojie talks of China’s progress in developing the rule of law. But he believes the law answers to the Communist Party, not the other way around. “We are making our system more democratic,” he says, explaining that this means his firm works with the government to stop disputes reaching courts. His waiting room displays a book with the collected wisdom of Xi Jinping, China’s president.

China is certainly not a fully free market. Yet it has come a long way since Chairman Mao. The structure of the economy looks very different depending on where you focus. There is an exuberant private sector, vital to China’s success. Employment in state firms plummeted in the 1990s when the government closed thousands of loss-making companies. The private sector more than made up for them. These days, officials use a rough “56789” formula to describe its significance: it accounts for 50% of tax revenues, 60% of GDP, 70% of innovation, 80% of jobs and 90% of companies. The point is clear. China would be nowhere without its private firms.

In many industries, China’s entrepreneurs face more cut-throat competition than their Western peers. Take property: the ten biggest developers account for 30% of sales in America but around 15% in China. The rush into new industries can be frenzied. China already has more than 1,000 robotics firms.

But at the same time, the government seems to be everywhere. China has 150,000 state companies. With preferential access to banks, they account for 70% of corporate debt. And in many industries, from finance to shipping, the government aims for what it calls “absolute controlling power”, limiting competition and blocking entrants. This is a danger for China when its economic priority is to increase productivity. State firms are much less efficient. Their return on assets is less than half that of their private peers (see chart).

 
These two parts of the Chinese business world are often described as separate, as if plucky private firms are battling clumsy state-owned rivals. In reality they are deeply intertwined. The challenge for private firms is not so much how to compete against state firms as how to coexist with them. Wanjiang Gangli, a water-monitoring company with headquarters in the Global Centre, has seen its business boom as the government has targeted pollution. “In this system when leaders focus on an issue, it’s highly effective,” says He Xin, its general manager. But that same power makes for frustrations. To get contracts, his firm must partner with state firms, which have little technology but lots of political clout.

The worry is that this coexistence, already fragile, is breaking down. Complaints about guojin mintui (the state advances, the private sector retreats) emerged a decade ago, when the government gave state firms lots of cash to help the economy through the global crisis. “Retreat” may at first have been an overstatement, but there is no doubt that the private sector stopped advancing: its shares of both investment and industrial output levelled off.

Now, under Mr Xi, it looks more like a full retreat. In the three years before he became president in 2013, private firms received roughly half of all bank loans. State firms got just a third. In the three following years, more than 70% flowed to state firms, according to Nicholas Lardy of the Peterson Institute for International Economics. The tone has also changed. The Communist Party has insisted that private companies, including foreign multinationals, establish party cells. A foreign manager at a car-parts company which cut staff last year says he had to discuss “social stability” concerns with his firm’s party secretary. It was a warning shot.

Some observers had thought Mr Xi would take China in the opposite direction. He initially pledged that market forces would play a “decisive role” in the economy. But he also vowed to strengthen state-owned firms. The latter pledge has been more potent. Over the past five years the government has merged steel mills, chemical companies and rolling-stock manufacturers, hoping to make them mightier. It has prodded private companies to invest in state firms, to make them more efficient. China Unicom, a state-owned telecoms giant, now counts three big private internet companies—Alibaba, Baidu and Tencent—as shareholders.

This risks dulling the edge of the private sector. Normally, companies get higher returns as they grow and reap economies of scale. In China the reverse happens, says Mark Williams of Capital Economics, a research firm. His hypothesis is that big companies draw more attention from officials. Political meddling hurts them.

Last year a little-known blogger published an article arguing that the private sector had fulfilled its “historic task” of enriching the country, and that it was time for it to fade away. The article went viral not because people agreed but because it encapsulated their fears. Since then officials have tried to reassure businesses that they are still wanted. Mr Xi has vowed “unwavering” support. Yet these protestations count for only so much. As long as the government remains determined to strengthen state-owned companies, there will be no level playing-field for private firms.

Standing in the shadows

Even when officials craft sensible policies, this imbalance can knock them off course. A dispiriting case has been their attempt to defuse financial dangers. To do so they have clamped down on shadow banking, a lightly regulated universe that includes everything from banks’ off-balance-sheet books to investment vehicles for the wealthy. Peer-to-peer lending is at the extreme risky end. One P2P firm, Zhongke Loans, resides inside the Global Centre. Wu Jinjun, its founder, describes his work with missionary verve. P2P lenders, he says, serve small borrowers, whom banks ignore.

But many P2P firms have either been fraudulent or mismanaged. Of the 4,000 that existed, two-thirds have failed. For Zhongke, staying afloat will be hard. It offers investors sky-high annual returns of 14%, which few companies can sustain. A ticker on its website measures, with disconcerting precision, how long it has been in operation: four years, three months, three days. Mr Wu’s immediate concern is the central bank’s belated decision to vet all P2P platforms and bar those that do not meet its standards.

Restoring order to the financial system is the right idea. But in doing so, the government has inadvertently stifled the private sector. Private firms are by far the biggest recipients of shadow loans. Banks prefer to lend to state companies that carry implicit government guarantees, especially when the economy slows. They do not favour the state for ideological reasons but because it is the best bet for them to get their money back, plus interest.

Even Western investors fall prey to these incentives. The manager of a major European fund recently met a Chinese bank to ask about a regulatory order to lend more to small firms. The fund manager feared that this would force the bank to take on undue risks. Fear not, the bank’s executive promised, it would reclassify subsidiaries of big state firms as smaller entities. This way it could satisfy regulators without imperilling its loan portfolio—a natural outcome in a system so heavily anchored by the state.


4 A new long march

Global economic dominance is not assured

LOTTE MALL, a high-end South Korean department store in the Global Centre, normally wants to attract people. But on March 7th 2017, it was trying to keep them away. Despite a chill in the air, dozens had gathered on the plaza in front. They waved the Chinese flag, played the national anthem and unfurled banners, one of which read: “We will not tolerate violations of our motherland’s safety!” It was, in short, not a typical day for staff more accustomed to selling face cream.

The trigger had been a decision by South Korea to install an American anti-missile system on its soil to defend itself against the threat of attack by North Korea. China perceived itself as the real target. State media lashed out at South Korea, and specifically at Lotte, because it had leased land in its home country for the anti-missile batteries. Protests hit some of Lotte’s 100-plus stores around China.

Sitting more than 1,000km inland, the Global Centre can seem remote from the rest of the world. But the global tensions surrounding China’s economic rise resonate in its corridors. The Lotte protests are a crude example of how China uses its biggest advantage—its huge market—to cow others into submission. Indeed, they were just the latest in a series of protests or boycotts freighted with political significance. Norway, the Philippines, Japan and Taiwan have all been on the receiving end.

China uses these outbursts of nationalism, whipped up by state media, to punish offending countries. The commercial pressure is hard to endure. Eventually South Korea promised China that it would refrain from additional deployments of the American defence system. But for Lotte it was too late. Its China business has not recovered. Having already sold dozens of stores, it is reportedly considering selling the rest, including its Global Centre branch.

There is an even bigger concern about the way that China wields its market power: as a lever to get companies to give up their technology. This is one of the core grievances behind America’s trade war with China. The American and European chambers of commerce estimate that a fifth of their members have faced such demands, and in high-tech sectors as many as two-fifths.
When China joined the World Trade Organisation in 2001, it pledged to stop requiring transfers of technology as a condition of market entry. The difficulty in building a case against China is that it has generally abided by the letter of its WTO commitments. Its methods are more subtle. From car manufacturing to cloud computing, foreign companies need local partners to operate in China. Regulators can also use product testing and approval procedures to compel them to disclose intellectual property. An unstated goal of these policies is to give Chinese firms access to foreign technology. But when challenged, China often replies that they are voluntary, commercial agreements.

Even more blatant is the outright theft of intellectual property. An IMAX theatre on the top floor of the Global Centre mall is an emblem of how brazen Chinese firms can be. The screen is one of 600 around China, IMAX’s biggest market in the world—but also one of its thorniest. In 2014 it won a $7m court judgment in Canada against a former employee, Gary Tsui, for copying its 3D technology and starting a rival in China.

It was a limited victory. Mr Tsui is still active in China, filing patents under his local name, Cui Xiaoyu. And he now works as chief engineer for China Film Digital Giant Screen (CGS), part of a state-owned company. No wonder foreign firms sometimes feel they are competing not against commercial rivals but against the state. In Chengdu, not far from the Global Centre, CGS opened its 100th screen in 2015. It now has more than 300.

There is no way to know exactly how much China has stolen. The American government estimates that its firms lose intellectual property worth up to $600bn annually to foreign thieves, with China the leading culprit. Like any claimant in a dispute, though, it has reason to overstate the damage.

China is not the first country to steal intellectual property or demand tech transfers. Brazil, India and Mexico insist on joint ventures in various industries. China, though, is unusual in its heft. If the behaviour of, say, Malaysia or Argentina seems unreasonable, foreign firms can leave. Forgoing China is tougher.

So the real question is whether China can get away with it. It is in this regard that Donald Trump’s hard line has been most notable. From an economic perspective American tariffs make little sense; they are a blunderbuss that will hurt America’s growth as well as China’s. Yet, unlike more delicate negotiating tactics in the past, they have made China pay attention.

The fallout has reached the Global Centre. At the office of Anbang Logistics, an international shipping company, employees are attempting to get goods to and from Chengdu. Li Jing, its vice-president, is blunt about the impact of the trade war, a view that seldom comes through in China’s state media. “Our business is exports, so we feel the pain directly,” she says.

The tariffs are having big knock-on consequences. Her firm can charge more for delivering electronics, allowing it to defray the cost of moving heavier products. But with Chinese electronics now facing tariffs in America, the cost of shipping other products has gone up. And Ms Li expects 2019 to be even worse. Unless, that is, America and China reach some kind of deal. Already, China has watered down some of its joint-venture requirements for foreign carmakers and banks.

Nevertheless, it is also easy to exaggerate the threat. The portrayal of China as an efficient, commercially minded, strategically brilliant government that, at its leisure nabs technology from foreign companies, rarely accords with reality. Policies are often much more muddled than they appear to the outside world.

Not taking off

Take the joint ventures. Perhaps the most notable fact is how rarely they have been effective. Despite an array of aviation partnerships, China has failed to create a decent passenger jet even after years of trying. A former industry minister famously described carmakers’ joint ventures as opium: Chinese firms are hooked on them for profits and make little of value themselves. Even theft only gets China so far. IMAX, for instance, believes the 3D technology stolen by its former employee is now outdated and that its Chinese rival has failed to keep up with its latest advances.

China has done well at building first-rate ports, highways and railways. But promoting innovation is harder. Patents filed by Chinese companies, for instance, are not all they seem. In the Global Centre, Finchos Electronics, a company that produces fingerprint readers, proudly displays dozens of patent certificates on its wall. Yet more than half are for incremental changes. Overall, China generates more patents in a year than America, Europe and Japan combined, but less than a quarter are for genuine inventions, and few of its domestic patents are recognised abroad (see chart).



Government subsidies also have shortcomings. DoubleFlyer, an education-technology company in the Global Centre, was granted a rent-free office in an industrial park in the suburbs. Such support works well for manufacturers but less well in knowledge-based industries. After six months Luo Sai, the young founder, moved DoubleFlyer back to the centre, to be closer to its business partners. Ms Li of Anbang Logistics raises her eyebrows at the Belt and Road Initiative, China’s mega-plan for investing abroad. Rail links between western China and Europe are the big accomplishment so far, an increasingly popular route for moving goods. But, without subsidies, she reckons that train costs would soar and exporters would go back to boats.

This is not to say that China is failing. Judging by growth or innovation, it has excelled compared with most other countries at its income level. But it still has far to go. Despite the name of its plan to develop advanced industries—“Made in China 2025”—which has caused so much concern in America, the bureaucrats who drew up the plan did not think that China could rival foreign prowess until 2049. That is cold comfort for firms whose technology has been stolen. But it is an indication of where China stands: its rise will be measured in decades, not years.

An irony of the trade war is that many of America’s demands are ideas that would propel China’s ascent. Opening more industries to competition would boost the private sector and productivity. Curbing subsidies would ease pressure on the public purse and curtail excess production. Better protection of intellectual property would stimulate innovation.

But it is China’s call. That a tycoon built the world’s biggest building deep in the interior, and that his building has been filled up with a dizzying array of businesses, gets at an essential truth: this is an economy whose fate is being written domestically. It is not pressure from outside that will make or break China, but its own decisions.

The direction is far from certain. Soon after Mr Deng ran into legal troubles, he put his assets, including the Global Centre, on sale. A local fund manager who looked over the books proclaimed that maintenance was too expensive and returns too low. But a buyer did come forward: the Yunnan Metropolitan Construction Investment Group, a state-owned firm.

The deal throws up red flags. The Yunnan group’s finances are wobbly. It has razor-thin returns and debt more than ten times higher than its earnings. The group is supposed to focus on building infrastructure in Yunnan, one of China’s poorest provinces, not on snapping up property elsewhere. It is a case of how state firms often hurt rather than help China by squandering capital.

Meanwhile, as one part of the deal, Mr Deng is back. He is working for the Yunnan group, tasked with helping it make a success of his buildings, including the Global Centre. A little more than five years after it opened, he can take some pride in it. Millions of people have come through its doors.

But he still has a challenge on his hands. To retain a shareholding in his projects, he has promised to deliver nearly $1bn in profits from 2018 to 2020, ten times more than over the previous three years—a nearly impossible task. Problems are also showing up. The waterpark now closes for half the year, because it is too costly to run in the winter when crowds are sparse. Doors have started to fail on some of the 200 lifts. Rainwater drips through the roof. This is one more way in which the Global Centre reflects the Chinese economy. Glittering from afar, the structure looks shabbier and less solid up close, and is sorely in need of renovation.


Britain’s Remainer elites have declared war on democracy itself

By Allister Heath



At moments like this, when democracy is being traduced, it is easy to be angry, to rage or to fulminate. I’ve been prone to such emotions myself over the past few years. Today, I’m merely grief-stricken: sad, but no longer furious.

There have been many bad days on the road to the Great Brexit Betrayal, but this was the most devastating so far. The vote by MPs to rule out “no deal” was a psychological bombshell, confirming that most of our “representatives”, including many members of the Cabinet, are ready to thumb their noses at us.

Theresa May’s deal, which would be the worst treaty the UK has ever signed, is back on the table. Philip Hammond wants an even worse solution, with the UK permanently stuck in the customs union, as he implied in his typically useless Spring Statement. To achieve such a super-soft Brexit in name only, there is only one solution: a Labour-Tory Remainer coalition would have to seize control, imposing a government of national unity while it reopens negotiations with Brussels. A fleeting majority at one moment in time – for example, in an indicative vote this week – wouldn’t be enough to achieve this. The Tory party simply wouldn’t hold together, and the Government would fall: the Remainers would need a different, more robust mechanism.

It was interesting to note just how Left-wing Hammond’s Statement was: it was focused on green issues and greater spending, and he hired the kind of economist a Labour chancellor would have picked to review minimum wages. Was he reaching out to Labour, Lib Dem and TIG Remainers?

The only way to stop such a coalition from emerging may be for Brexiteers to topple the Government before it is too late, simultaneously seeking to change Tory leader and triggering a general election. But then what? A genuine Brexit is still possible, but it may require a new political alignment in Westminster, with many more defections, and Tory Leave and Labour Remain parties. How long will it take to achieve this?

My question to those who voted to halt no deal last night, and who will wreak yet more havoc in the coming days, is this: do you not see how, by discrediting and ridiculing our democracy, you are undermining our greatest asset? Why do you think our cold, rain-sodden country with its broken infrastructure and second-rate trains has been so successful for so long? Our stability, our freedoms, our prosperity, our rule of law: all are predicated on our extraordinary political traditions. If we trash them, if our elite declares democracy to be a pathetic sham, we’ll have nothing left.

Why risk doing so today? Yes, a real Brexit would be disruptive, but exploding our reputation for straight-dealing, for fair play, for respecting procedures, customs and rules would shake the foundations of our society, annihilate trust and prove immeasurably more damaging. The UK would become like France or Italy, unstable countries where populists increasingly rule the roost, where the public loathe their rulers and vote against them at the earliest opportunity. Staying in the EU would make our politics more European too.

It became clear about 20 years ago that something had to change. For the first time since universal suffrage, an ideological gulf started to develop between voters and politicians. Parties were becoming unrepresentative on a range of issues. At the same time, the country was undergoing extensive constitutional change: the EU was turning into a technocratic monster, sucking away ever-greater powers from Westminster; a new quangocracy was building an independent base; a strange form of devolution was seeing Scotland, Wales, London and other cities granted huge spending powers, without a concomitant responsibility to raise their own taxes; and the volume of legislation had exploded.

At first, this growing ideological and practical disconnect between voters and the political class didn’t matter: the public was merely behind the curve, it was thought, and would soon catch up. This proved true on some important social issues, where the MPs led and the public followed.

But in other areas, including on membership of the EU, our approach to crime, to foreign aid, to immigration and much else besides, the gulf continued to grow. New parties emerged, not least Ukip, threatening to upend the old order as surely as Labour had done a century before.

David Cameron’s solution was to call a referendum. The public was increasingly Eurosceptic, yet Parliament was dominated by supporters of the EU. The only way to resolve this clash was to ask the people to decide once and for all – but this just made the crisis worse, encouraging parts of the political class to declare independence from the voters.

Voting Leave was a perfectly reasonable answer: most of the world’s countries are self-governing. The politicians weren’t being asked to defy the physical laws of gravity, or to bring about perpetual world peace, or to deliver six genuinely impossible things before breakfast. They were being asked to regain control of the UK’s laws, borders and money. Leaving the EU was a radical decision, but not an utopian one. It was bound to be technically challenging, but not impossible. Countries break away all the time: that was the story of the 20th century, as the principle of self-determination swept away empires.

Ministers are given chauffeur-driven cars for a reason: in return for the privileges that accompany their office, they must deliver on the democratic will. That is what imbues our political system with legitimacy. They cannot claim that everything they don’t like is “undeliverable”, or deliberately ensure that it fails.

Yet today, this wonderful political tradition is in jeopardy. Thanks to the sabotage of Brexit by the Remainers entrusted to deliver it, the majority of the political class is declaring war on all Brexiteers and all democrats. I can think of no greater tragedy.

Will Germany Permit Joint European Security?

In an institution as large and complex as the European Union, there will always be blame to go around when efforts to deepen economic and political integration fail to get off the ground. But when it comes to developing a joint EU defense capability, it is clear where the problem lies.

Joschka Fischer

german armed forces


BERLIN – US President Donald Trump has proved truly disruptive to the transatlantic relationship. His questioning of America’s mutual-defense commitments presents NATO with an ominous and potentially existential crisis. The US security guarantee, after all, is one of the two pillars upon which European peace and prosperity have rested since the end of World War II. And nor has Trump spared the second pillar: the rules-based global trade system and economic order.

Just two years after Trump’s election, Europeans find themselves shivering alone in the icy winds of international politics, rightly wondering what is to be done. It stands to reason that Europe must deepen its internal bonds, close ranks, and strengthen its military capacity. Some might question whether this is what Europeans truly want, given that we are living in the age of Brexit, which will deprive the European Union of its second-strongest military and economic power.

But just because the British don’t seem to know what they want doesn’t mean the rest of Europe is in the same boat. In fact, most Europeans favor a stronger, more powerful EU with a joint security policy.

The big exception is Germany. As the EU’s economic engine and most populous member state, there can be no joint security policy without the country that sits at the very heart of Europe. But it is an open question whether achieving joint European security with Germany’s participation is even possible.

Europeans must not allow wishful thinking to obscure important facts, as happened when the European Monetary Union was being formed in the 1990s. From the start, there were pronounced differences between individual member states not only with respect to economic and fiscal policy, but also in terms of political culture and mentality. Nonetheless, willful ignorance prevailed, and the monetary union was launched without the integrated political institutions that such a project requires.

The EU must not make this mistake again. Today, the main fact that cannot be ignored is that a joint security policy will require a compromise between Germany and France, the two largest and most powerful member states. Such a compromise will not come easily. The two countries’ political mentalities, historical narratives, and geopolitical interests are simply too far apart, and in many cases diametrically opposed. Still, owing to its particular history, Germany poses the bigger obstacle, even if its official rhetoric suggests otherwise.

For its part, France’s traditional self-image reflects its long history as a great European power, even if that era – and Europe’s global dominance generally – has passed. As a nuclear power and a permanent member of the United Nations Security Council, France views its military actions and arms exports not as moral failures but as the prerogatives of a world power conducting foreign policy.

The genius of Charles de Gaulle was to claim the status of a victorious power for his country after World War II. Doing so invited French citizens to forget the Vichy regime, the defeat by the Nazis in 1940, and the internal political rifts of the 1930s. It was thanks to de Gaulle that France maintained its historical course.

The same cannot be said for Germany. During the twentieth century, Germany made two bids for European hegemony and world domination, and the price it paid was its own destruction, to say nothing of Europe’s. Its sense of historical continuity was demolished in 1945, at which point its culture and traditions were devalued and its territorial integrity destroyed. Germany became synonymous with aggression, terror, and genocide.

Postwar Germany abandoned military-based power politics and foreign adventurism, and concerned itself primarily with economic development. Germans simply saw no other way to gain reentry to the democratic West, let alone reclaim political sovereignty. This strategy culminated in the reunification of East and West Germany in 1990.

With the shift away from power politics in 1945, Germans on both the left and the right became pacifists. And to this day, many Germans remain deeply and emotionally committed to neutrality, despite many decades of European integration and NATO membership. This has been particularly true in the post-reunification period, owing in no small measure to America’s security guarantee and willingness to manage the dirty business of power politics on Germany’s behalf. But this cozy division of labor, like the American-led postwar order, came to an end with the election of Trump.

A German return to traditional power politics certainly has its risks. But the alternative is to maintain the status quo and forego a joint EU security policy. A policy consisting of more than lofty words necessarily implies a deepening of political integration in the name of European sovereignty. Without common export rules, for example, there can be no meaningful cooperation on European armaments development, let alone more far-reaching and ambitious projects.

Germans are currently engaged in an intense debate over defense spending, which must rise to 2% of GDP by 2024 to meet the country’s NATO commitments. Given the foreseeable geopolitical risks on the horizon, in the absence of a joint EU security policy, German defense spending would have to rise even higher to make up for the US’s withdrawal from Europe.

Needless to say, Germany’s rearmament on its own would raise many questions and historical concerns. Rearmament with and for Europe and NATO, however, would be a completely different matter. One way or another, Europe must grow stronger. It is in everyone’s interest that Germany be productively engaged in that process.


Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO's intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960s and 1970s, and played a key role in founding Germany's Green Party, which he led for almost two decades.


The “Intrinsic Value” Myth

By Joel Bowman





Today, we unsheathe the mighty pen to slay a sacred cow… or perhaps merely to foil a lame canard.

Every so often, history invites Man to reconsider all he thought he knew about a given subject, to upend his presuppositions, and to send him – humbled and eager – back to the drawing board once more.

And a good thing, too, for unexamined “truths” can do just as much to retard our intellectual development as undiscovered lies. Especially when we tend to adhere blindly to them, often in care of little more than wounded Pride.

But let us turn directly to our subject, to meet it head on: Money is the matter… its nature our question.

What is money? We begin before its birth, to get a fuller picture.

Prior to money itself – that is, before folks carried cash, coins, cryptos, cowrie shells, et al. – there was barter. A barter system is one of direct exchange and, as such, does not require money as an intermediary to function. For tens of thousands of years our wandering ancestors got by on such a provincial understanding.

The barter arrangement is primitive, at best - suitable only for relatively simple transactions in which both buyer and seller desire the exact good offered by the counterparty, and at precisely the right time; something economists call the “double coincidence of wants.”

In a complex economy, however, "my three pigs for your one cow" does not exactly form the framework for a viable economic system. (As for vegetarians, they are simply out of luck… as well they should be.)

Enter money.

Money, Money, Money

By the time the Greek philosopher Aristotle (384 B.C.- 322 B.C.) was to be seen traipsing the halls of the Lyceum, Man had been using all manner of scrip and shekel to facilitate trade. Some monies were undoubtedly superior to others, with gold and silver typically rising up the ranks over their competitors.

The question of the day was, Why? What made one money better than the next?

An incurable cataloger, Aristotle quickly set about defining what henceforth came to be known as his eponymous “essential characteristics of sound money.”

Readers of these pages will have no problem reciting them. (All together now!) A sound money, according to the Father of Logic, must be:

Durable – as a store of wealth it must not rot, melt, erode, corrode or find itself otherwise debased or debauched by the fickle whims of nature’s many gods.

Portable – easily transportable, preferably something one can carry around in his back pocket; that he need not bring into town on the back of a donkey.

Divisible – capable of "making change," something he can dissect into the denominations necessary to make paying a king’s ransom and buying a measure of mead transactions of equal ease.

Fungible – mutually interchangeable i.e. one unit ought to be as good as the next.

So far, so good. But let us reckon further on the old Peripatetic’s fifth point for a moment.

In addition to the abovementioned characteristics, Aristotle proposed sound money have “intrinsic value.” In other words, the material from which the money is fashioned should be a worthwhile commodity “in its own right.”

It is here that the inquiring brow furrows and the soft head begins to ache.

What, exactly, is "intrinsic value"? And what role do phrases that typically accompany it (“in its own right,” and “in and of itself”) really serve… other than to act as polite placeholders for a better, absent answer.

Some suspected “intrinsic” value had to do with “something you could touch and hold in your hand.”

But that merely explained a physical characteristic (tangibility). Moreover, one can hold lots of things in his hand, not all of them valuable. (The corollary, of course, is that many intangibles – algebra, language… love – are so valuable one could hardly do without them.)

Others posited that “intrinsic” value derived from “a long-standing track record.”

But that only spoke to Man’s historical preference for one thing over another. Plenty of things go out of favor or are rendered obsolete by technology. Could “intrinsic” value really be so fleeting?

Still others claimed “intrinsic” value came from a thing’s potential applications elsewhere (away from its role as money).

But that merely described potential use cases, which again, time and tide and technology might come to replace.

Thus the underlying query persisted: If value was indeed “intrinsic,” if it really was “in the thing itself,” surely it would be there whether man found use for it or not? Like a tree falling in the abandoned woods.

Clearly, Value (capital “V”) had a problem on its hands: whence cometh thee?

For more than two millennia, the question either failed to ask itself clearly and in a loud enough voice, or nobody bothered to answer it anyway.

That was until none other than Adam Smith presented it (borrowing from a little-know dialogue of Plato’s) as the diamond-water paradox. Briefly put: How come diamonds are so much more valuable than water when they are clearly less objectively necessary to human wellbeing?

Some contemporary economists supposed the answer to be found in scarcity. (Diamonds are far less plentiful than water, therefore command a commensurately higher price.)

But there, again, was yet another of many logical culs-de-sac. If scarcity alone accounted for value, how come would-be brides were not lining up to score Tanzanite engagement rings in preference to comparatively abundant diamond ones? Why don’t people yearn to contract rare diseases? Why do they pay top dollar for ubiquitous iPhones while happily discarding old, relatively uncommon Nokias?

The problem (hint!) was that the scarcity proposition addressed only the supply side of the equation.

Smith himself attempted to solve the conundrum by introducing the Labor Theory of Value (LTOV). From An Inquiry into the Nature and Causes of the Wealth of Nations: “The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.”

But even this value theory only dug the hole deeper. What if a man simply stumbled upon a diamond while out on a casual and fortunate stroll? Surely his minimal labor would not warrant the price he could fairly expect to command for his new shiny stones?

Besides, chopping away at the branches, Smith hardly attacked the problem at its root; why does Man go to the “toil and trouble” of acquiring something in the first place? Why does he value the thing enough to even bother?

Next came Karl Marx, a man who never saw a cart he didn’t want to put a horse behind. Using the backwards reasoning before him, Marx used Smith’s very same Labor Theory of Value to smuggle in his class struggle, claiming that the owners of the means of production necessarily oppressed the proletariat because the latter’s labor was not accorded the value commensurate to the product he churned out. (Marx apparently held little regard for the risk the capitalist – private owners of the means of production – necessarily put into the operation in the first place; start-up costs; machinery acquisition; licensing; his own time; risk of failure and the sleepless nights that entailed, etc., etc., etc…)

Alas, Value was still orphaned, without a source on record. At least, that’s how it appeared.

As it happened, the answer was staring Man in the face all along… provided he was looking in the mirror.

Enter another giant on whose shoulders subsequent thinkers would firmly stand: the father of the Austrian School of Economics, Carl Menger.

Rejecting the “cost-base” (labor) value theories of the classical economists, Menger posited a new perspective entirely: that of Man himself. Goods are valuable, he asserted, because they serve various uses whose importance differs with regards to individual preference.

In other words, just as beauty resides in the eye of the beholder… and offense in the ear of the listener… so too does value find its womb in the subjective preferences of parties to a given trade.

Menger’s insights influenced many subsequent thinkers, including Ludvig von Mises, who perhaps set the record straight in clearer terms.

Value, as Mises described it, was not determined by the nature of objects themselves in a vacuum, but through our interactions with and subjective appreciation for them. "Value is not intrinsic, it is not in things," he argued in Human Action. "It is within us; it is the way in which man reacts to the conditions of his environment."

In this manner, one object – one money, say – has value over another, not because it is intrinsically bestowed… but because we afford it value through our interaction with and appreciation for its various properties. We understand intuitively that, depending on the moment in time and the particular circumstances attending it, gold can be a blessing (as in times of hyperinflation) or a curse (as it was for mythical Midas).

Who among men, dying of thirst in the middle of the desert, would not trade all the gold in the world for a drop of life-sustaining water? Who on his deathbed would be without his tender (intangible) memory, even for a second, if it meant forgoing a gram… an ounce… a whole chest of yellow metal? Who in that same moment would not buy another breath of time, for himself or for a loved one?

Through Subjective Value Theory, we are all the better equipped to understand why gold has proven a money of superior value throughout history. Likewise are we able to understand why cryptocurrencies – non-fiat, intangible and scarcely imaginable to even Aristotle’s bulging cerebrum – may well prove valuable in the Digital Age into which we presently venture.

As for slaughtering sacred cows and foiling lame canards, whether the metaphor be bovine or anatine, the best way to view the human project seems to be by standing on the shoulders of giants… not unquestioningly carrying them on your own.


Cryptocurrencies untether the goat of sovereign tender

The existence of digital currencies challenges the idea that money can only be created by nation-states

Simon Gleeson


Growing on trees: we have removed the real goats from the system, and now use only notional goats © Dreamstime


Back in the 1930s, according to John Maynard Keynes, one of the jobs of a district commissioner in Uganda was to inspect and evaluate goats.

The local unit of currency was the goat, so most goods were priced in goats. So when a local sought to discharge a debt by presenting an animal that was exceptionally sick, old or otherwise undesirable, the district commissioner would rule on whether that particular animal was fit to count as a “goat” for transactional purposes — whether it was, as it were, a negotiable goat.

One way of understanding this system is that the relevant economy was in effect on a “goat standard” — the value of its standard currency unit was linked to the value of an underlying commodity. If the value of that commodity decreased relative to other commodities, the value of the currency unit would decrease proportionately (that is, there would be inflation) and vice versa.

The goat standard and the gold standard are identical concepts. In both cases the idea is that money has value because it is in some way associated with a real thing, for which it can be exchanged. However, this “commodity standard” model has now been largely abandoned.

Today’s “fiat” currencies derive their value solely from the promises of their sovereign issuers.

In effect, what has happened is that we have removed the real goats from the system, and now use only notional goats.

This means that we have stripped the idea of currency down to its barest essence — that it is no more than a token deriving its value exclusively from the expectation it will be generally accepted in payment. In a world that operates on this model, anything that is accepted as payment functions as currency, regardless of the identity of its creator. It should therefore be no surprise that we have seen a boom in the creation of cryptocurrencies: entirely private tokens created for the purpose of functioning as payment mediums.

The existence of such currencies challenges head-on the idea that money can only be created by nation-states. In particular, it refutes the idea that what gives money its status is the existence of national laws obliging citizens to use it — deeming it “legal tender”.

If this were the definition of currency, then it would provide the necessary link between sovereign status and money creation. However, it is clearly not. Citizens of Weimar Germany, for example, did not stop using the mark because it ceased to be legal tender, but because it ceased to be accepted in payment by their fellows. Equally, the Zimbabwean economy switched in a relatively short period of time from the Zimbabwean dollar, which remained legal tender, to the US dollar, which was not, without losing a monetary function. In practice, when a unit is no longer confidently expected to be generally acceptable in discharge of debts, it ceases to be money, regardless of its legal status. So where does this leave the sovereign link?

In any economy, the thing known to be acceptable as payment to the largest participant in that economy will function as money. Since the sovereign is the largest participant in any national economy, anything it accepts as payment will be de facto “money” in that economy.

This link, however, comes at a price. Because currencies are perceived as obligations of the sovereign, they gain or lose value as a result of fluctuations in the creditworthiness of that sovereign. Viewed in this light, the sovereign promise that backs currencies is simply a modern variation of the goat — the link tying a notional unit of account to an external thing. In 1971 the US untethered the dollar from physical gold; a move away from fiat currencies is the logical next step.

Breaking that link through the use of privately issued payment instruments is equivalent to ditching the underlying goat. Once he is gone, the goat will probably not be missed, any more than the gold standard is missed today.


The writer is a partner at Clifford Chance and author of ‘The Legal Concept of Money’