Fiscal stimulus

Why Joe Biden’s proposed stimulus is too big

America’s economy needs targeted relief more than indiscriminate spending

America’s economy will recover faster from the pandemic than its rich-world peers, the IMF predicts. 

Not because it has controlled the spread of disease—it hasn’t—but mostly because of its enormous economic stimulus, which boosted household incomes by more than 6% in 2020 even as the unemployment rate peaked near 15%. 

Before Joe Biden became president, Congress had already spent $4trn fighting the crisis. 

Now he proposes $1.9trn more emergency spending, which would take the total to over 25% of GDP in 2019. 

Republicans think that is too much. 

A group of the party’s senators has made a counter-offer of a plan worth about $600bn. 

The right size for the bill is not best judged from the top down. America is not in a normal recession that is best solved by a calibrated slug of government spending. 

No amount of pump-priming will fully reopen restaurants, nightclubs and offices while the virus remains prevalent—nor would that be desirable. 

The government must instead fight the crisis from the bottom up.

Congress should spend whatever is needed on vaccinations and on replenishing the incomes of workers bearing the brunt of the crisis. 

They have lost their jobs through no fault of their own, and if their incomes collapsed, they would slash their spending, spreading the pain to the rest of the economy. 

Extending a generous top-up to unemployment-insurance benefits beyond its expiry in March should be a priority.

Nobody should fret about the cost of providing what is in effect disaster relief. Prolonging vast deficits, however, does carry a risk. 

According to official projections released on February 1st, without more stimulus America’s gdp would lag behind its potential by only 1.3% at the end of 2021. 

Mr Biden’s proposed spending is six times bigger than the shortfall. The “multiplier” effect of government spending on output is hard to estimate, but is small today because many households are saving stimulus money. 

Yet should vaccinations let the economy reopen fully in the second half of 2021, the pent-up effects of stimulus may cause the economy to overheat, leading to a burst of inflation.

Higher inflation would be tolerable—welcome, even, up to a point. 

But it would mean any further deficit spending, for example on Mr Biden’s infrastructure plan, would further stoke the fire. Better to preserve fiscal fuel by avoiding unnecessary largesse. 

Democrats want to send cheques worth $1,400 to most individuals, adding to the $600 they recently received. 

Universal handouts stop people falling through the cracks of bureaucratic means-tested programmes, but $2,000 is an arbitrary total popularised by Donald Trump. 

Mr Biden’s plan also includes $350bn for state and local governments. Early in the crisis it looked as if they would suffer a collapse in tax revenues. 

In fact, their budgets have held up as the federal government’s generous unemployment benefits and a burst of spending on goods have boosted their tax receipts. Neither of these items in Mr Biden’s bill is a priority.


The right fiscal policy would be flexible, providing emergency spending for as long as the pandemic persists and saving a broader fiscal boost for later if necessary. 

Republicans—and some moderate Democrats—are right to argue that $1.9trn is excessive today. 

Mr Biden may be willing to trim his proposal. 

A figure of around $950bn would allow for unemployment insurance, a smaller amount of catch-all universal cheques, Mr Biden’s assault on child poverty and extra spending on vaccines.

Equally, Democrats are right to fear that hawks in Congress could derail the recovery if the crisis worsens. 

Republicans should pledge to support further spending were that to happen. 

The Democrats should husband their limited opportunities to circumvent Republican opposition in the Senate. 

A bipartisan agreement now will raise the odds that the economy will get the right amount of support at the right time. 

Transfer of power

A new epoch for retail investors is just beginning

Technology may soon make markets for all kinds of assets as liquid as the stockmarket

For nearly a fortnight, the world was mesmerised by the fortunes of GameStop. 

Shares in the beleaguered brick-and-mortar purveyor of video games soared from a few dollars in 2020 to above $480 on January 28th, before sinking as low as $81 on February 2nd. 

A firm that was worth $200m in April last year was briefly valued at $30bn before falling back to Earth. 

The gyrations, fuelled by an army of day traders that dwells on forums on Reddit, a social-media site, have been chronicled on every front page and ruffled the feathers of regulators and politicians in Washington, dc.

Look beyond the memes and the mania, though, and the story tells you something about the deep structural changes in financial markets. 

The fact that the fast-paced frenzy was possible is a testament to just how frictionless trading stocks has become, aided by technological advances. Shares can be bought on an app while you queue for a coffee, at a price that is whisker-close to the wholesale price.

Progress towards unfettered stockmarket access began in 1975, with the abolition of huge fixed commissions and the entry of discount brokers like Charles Schwab, says Yakov Amihud of New York University. 

Then came automated trading and the decimalisation of share prices. By the 2010s, high-frequency traders had risen to dominate share trading (see article). “At each stop along the road, the market offloaded some trading costs and liquidity improved,” says Mr Amihud.

Trading costs tumbled, and the quantity of shares traded ballooned. The more participants piled in, the quicker and cheaper it became to trade, in turn (see chart 1). 

In 2015 Robinhood, the online broker through which many GameStop trades would flow, was launched, becoming the first platform to charge users no fees at all. 

That, and the pandemic, which freed up time and provided stimulus cheques as starter funds, have spurred retail participation to new heights. 

Retail investors made up a tenth of trading volumes in America in 2019. By January this year their share had risen to a quarter.

As frictions were sanded down, powerful institutional investors that had padded their bottom lines by charging meaty fees for exposure to stocks saw the assets they control slip away. 

Now they compete with a range of vastly cheaper offerings: index funds that track the market; exchange-traded funds (ETFs), which offer access to baskets of assets; and robo-advisers, which allocate cash among cheap funds according to portfolio-management theories. 

Such innovations, possible thanks to advances in computing power and machine learning, have probably saved investors $1trn or more in fees since 1975.

Outside stocks, fat fees and thin volumes still gum up markets, resulting in slow-motion transactions and deterring traders. 

But the same forces that pushed down trading costs and drove up liquidity in the stockmarket are poised to disrupt all manner of assets, from corporate bonds to property, and even Picassos and classic cars. 

As happened with stocks, this will eventually empower individuals at the expense of established intermediaries.

Wherever you look, technology has helped create new, liquid markets. “The market for knick-knacks in the attic was once illiquid,” says Alvin Roth, a Nobel-prize-winning economist. 

“The internet made it possible to have your lawn sale on eBay.” gps and smartphones made ride-sharing apps—which create thick markets for journeys—possible.

Examples in financial markets abound. In 19th-century America buyers travelled from farm to farm testing wheat before striking a deal with a single farmer. Then railways made it possible to move grains cheaply in silo cars. 

But these silos also made it wasteful to store farmers’ grains separately. 

So in 1848 the Chicago Board of Trade started classifying wheat by quality (1 the best, 5 the worst) and by type (red or white, soft or hard, winter or spring). 

Standardisation brought down the cost of moving and shopping for grains, making the market more efficient. 

The process was so effective that the word commodity is now synonymous with standardisation.

But building a liquid market for an asset is not easy. To see why, compare the markets for bonds and property with equities. 

They are broadly comparable in size (see chart 2). 

Yet bonds and buildings change hands in different ways. 

This is largely the result of fragmentation. 

There are 4,400 listed firms in America. An investor buying a share in AT&T does not care which one they hold—it is as if they were picking from a set of identical marbles. 

Now imagine they want to buy an AT&T bond. 

It is as if a single marble had been smashed into hundreds of pieces, each of them different. 

There are 224 AT&T bonds alone: each pay different coupons, mature at different times and are worth different amounts. 

And there are 300,000 distinct corporate bonds in America. 

Now imagine the investor wants to buy property. 

All those marble fragments have been ground into sand. 

Available figures suggest there are 5m-6m commercial buildings and more than 140m dwellings in America, each unique.

Fragmentation chills trading activity. 

The market for stocks is bustling. 

AT&T shares change hands 40m times a day (though some investors will hold for years, and high-frequency traders might hold for less than a second). 

Small-cap stocks—recent action in GameStop aside—tend to trade less frequently.

Bonds are stickier and dearer to trade. Even the most liquid of at&t’s bonds only trades a few hundred times a day. 

“Some bonds are like museum pieces: they get put away in insurance companies’ portfolios, never to trade again,” says Richard Schiffman of MarketAxess, a trading platform.

At the stickiest end is property. A slice of real-estate investment is offered to the masses, via listed trusts. 

But the big investments, managed by private-equity firms, are open only to institutions like pension funds or wealthy individuals. 

Houses, too, turn over slowly. 

Buyers and sellers must be painstakingly matched. Sellers in America pay a meaty 5-6% commission. Just 5% of homes change hands a year.

Low transaction volumes make it difficult to price assets. The price of a share in at&t can be arrived at instantly. 

Some bonds, like recently issued Treasuries, are easy to price too. 

Older issuances are trickier. 

Traders either attempt to match a seller with a buyer, or look at recent transactions in similar bonds as a guide. 

Pricing property is a similar, but more glacial, process.

Fragmentation long seemed a hurdle to making the bond market as rapid-fire as the stockmarket. 

An institutional investor wanting to buy a bond would talk to two or three big banks or brokers that dominate the market. 

But this is starting to change thanks, in large part, to open-ended fixed-income etfs, funds that hold diversified baskets of bonds. 

These enhance price discovery and trading volumes in two ways.

All the world’s a market

The first is through their design. Some of the fixed-income etfs offered by BlackRock, an asset manager, have 8,000 or more different bonds in them. 

As demand for an etf rises, it begins to trade above the fair value of its component bonds (ie, at a premium). 

“When one of our etfs trades at a premium we expect to see creation activity,” says Samara Cohen of BlackRock. 

The firm works with a handful of marketmakers, which have an incentive to expand the size of the etf when it trades at a premium. 

Jane Street Capital, one such marketmaker, might offer BlackRock a portfolio of 400 bonds to add to its etf, pushing the price back towards fair value. Jane Street gets to keep the difference—it bought those 400 bonds at market price, and sells them at the implied premium at which the etf was trading. 

When the ETF gets cheaper, the reverse occurs. Jane Street redeems units of the ETF for its component bonds at a discount and sells them for market prices (again, pocketing the spread). 

All this activity, which is increasingly automatic, enhances price discovery.

The second effect is through the wider trading of an etf. Each time it trades, a reference for its component parts is created, which helps price other bonds. And etfs trade far more frequently than their components. 

In March 2020, as volatility shook markets, BlackRock’s biggest investment-grade corporate-bond etf traded 90,000 times a day. The top five holdings of the fund traded just 37 times. 

Price accuracy means lower trading costs—a step towards frictionless markets.

Trading technology is also improving. MarketAxess was set up to make it easier for investors to contact all the big banks’ bond desks and brokerage firms—around 20 firms in total—at once. 

But the platform has since introduced open trading, which functions almost like an exchange, letting all participants interact with each other. 

The result is that trading need not be solely dependent on banks for liquidity, says Mr Schiffman. Around a third of the transactions MarketAxess facilitates on its platform are such “all-to-all” transactions.

The next phase might be automating bond trading. Overbond, a fixed-income analytics firm, consolidates trading data that it plugs into a machine-learning algorithm. 

The algorithm finds recent transactions in similar bonds and spits out implied prices. It was the arrival of fast serverless cloud computing that helped the algorithm mimic a human trader in real time, says Vuk Magdelinic of Overbond.

In less liquid assets, like private equity and property, the seeds of change have just been planted. 

To smaller investors, illiquidity can be a curse: nervous regulators try to restrict access to illiquid assets. But for institutions, it is a boon. 

Private-equity pitch books chatter about the “illiquidity premium” their investments earn. 

The result is that private markets hold appeal for certain types of investors that are willing and able to lock their money up, but not others. 

A quarter of university endowments and a sixth of sovereign-wealth funds’ capital are invested in them. 

By contrast, insurers and retail investors plough just 1% of their capital into private markets.

And all the men and women traders

This too could eventually change. 

For one, firms in private markets are beginning to create funds that can expand or shrink as they gain or lose clients, an innovation that echoes that of bond etfs. 

Investors typically buy into private markets when a fund manager raises capital. 

The capital is locked up for a decade or more, and used to buy 20 or so companies or real-estate investments over several years. 

But in January Hamilton Lane, an asset manager, launched a private-equity and private-credit fund that circumvents this dynamic by ditching the fundraising cycle.

“When a [private-equity] fund manager buys a company for their fund they may ask us to partner with them for the equity for the project,” says Drew Schardt of Hamilton Lane. 

This is a cheaper way of getting access, he notes: direct or co-investment deals do not have any underlying fees attached to them. 

These deals come along fairly regularly, allowing the fund to grow with demand. 

It can also shrink: the fund is structured so that its investments mature regularly. 

They should do so at a rate of 20% a year, fulfilling the limited redemptions the firm plans to offer. 

It also plans to match those keen to exit the fund with others buying in, using third-party valuations.

Other startups want to go even further. 

Regulation is helping them. Only accredited investors can invest in property, venture-capital funds or hedge funds. 

“Accredited” once meant the rich, those earning more than $200,000, or worth more than $1m. 

But a rule change in 2017 means that those with professional experience or knowledge are now eligible too.

This change has fuelled the growth of startups offering property investments to the masses. 

One such firm is Cadre, set up in 2014. Ryan Williams, its co-founder, who previously worked at Blackstone, an alternative asset-manager, wants to build an exchange for commercial property that allows people to trade stakes in buildings, almost like a “digital stockmarket”.

Cadre finds an investment opportunity with a life of around five or seven years and lists it on its platform. Investors can buy pieces of it through the site. 

Every quarter, rental income is paid out and investors can choose to cash out through a trading system. 

“We provide a quarterly valuation for their investment, and they can choose to sell all or some of their stake at a range of prices,” says Mr Williams. 

This secondary market typically clears quickly.

Low fees are likely to be part of the draw. 

Cadre charges a 1% fee on any cash deposited on the platform and an annual management fee of 1.5%. 

This is just a quarter of what an investor might pay a traditional alternative-asset manager. 

The firm’s clients include the establishment: Goldman Sachs, a bank, is spending $250m on behalf of its wealth-management clients. 

But individuals are stepping in, too.

Yieldstreet, which was founded in 2015, offers property investments as well as those in snazzier alternatives like art, marine finance (such as the funding of container ships) and private credit. 

In 2015 the Securities and Exchange Commission changed its rules on “mini” initial public offerings (IPOs), increasing the amount that can be raised to $50m. 

A clutch of firms have since listed artworks and classic cars.

Even in residential property, the most sluggish and expensive market of all, firms are using technology to improve efficiency. 

“When we thought about what makes a properly functioning marketplace, it all came down to price discovery and data,” says Rich Barton, the founder of Zillow, an “i-buying” firm, which acts like a marketmaker for houses. 

After a decade gathering data on every home in America, it can now plug a property’s characteristics into machine-learning algorithms to price them, just as Mr Magdelinic plugs in characteristics of bonds. 

Zillow buys homes based on the algorithm’s assessment, taking them onto its balance-sheet. It then sells these on its platform.

There is evidence this is pushing down agents’ fees. Commissions are dropping quickly in areas in which i-buyers operate. 

A study by Mike DelPrete of the University of Colorado suggests that the fees i-buyers pay to buyers’ agents are falling. In places such as Phoenix, Dallas, and Raleigh the fees paid to agents have dropped by around 0.5-1 percentage points in a little over a year. In Atlanta they have fallen by half in just two years.

Bring these developments across disparate markets together, and it seems clear that technology is making it possible for liquidity, price transparency and competition to crop up in a variety of financial markets. 

True, the markets for art, bonds and houses will never be quite as frictionless as the stockmarket. 

Mr Schiffman thinks Tesla’s bonds are unlikely to be as exciting as its shares. 

The clue is in the name. 

“It is fixed income!” he laughs. No one will make a snap decision to buy or sell a house—because they have to live in it.

They have their exits and entrances

Yet the oncoming rush of liquidity should worry institutional investors. Many help their customers gain exposure to a basket of small companies, or to commercial property. 

But that often comes as part of a pricey package deal: clients must also buy the slick advice that comes with it. Once it became possible to buy exposure alone in the stockmarket, many of them ditched their stock-pickers.

Now price transparency and liquidity seem bound to deliver fierce fee competition in other asset markets. 

Retail investors may one day be able to stuff their cash into a portfolio of low-fee funds in everything from stocks and bonds to art and property. 

It is this, rather than gyrations in GameStop stock, that will give retail investors more power over Wall Street. 

The Real Silver Squeeze Likely Still Ahead

Peter Krauth


- Silver and silver stocks' explosive move higher was just a taste of what's to come.

- The WallStreetBets call-to-action has brought wild action to the silver market, but supply/demand fundamentals will make future buying stick.

- Now, a much bigger share of investors is aware of the silver space.

- With falling supply and soaring demand, especially from investment, silver's mania stage still lies ahead. This was just the opening act.

"Temporarily out of stock." - That's the message most hopeful physical silver buyers have been getting since the last days of January. 

Odds are bullion dealers going to have a tough time keeping any silver in stock.

Everyone is buying, and no one is selling the physical metal. 

Dealers are asking for 35% premiums… and that's if you can get your hands on any silver at all.

And yet, I remember well, less than a year ago in mid-March when the world started a major lockdown in response to the Covid-19 pandemic. 

Gold and silver bullion dealers were nearly completely sold out within days. 

In some cases, silver premiums reached historic highs, near 100% of spot prices.

In the recent #silversqueeze hype, silver traded at an 8-year high, as demand was exploding. 

Silver has given back $2 since its $29 peak on Feb. 1. 

But it's still up 20% since late November and has gained 125% since its March lows.

And silver stocks have been surging. It's all related to the now infamous WallStreetBets calls to action, the latest of which targeted silver. 

It was enough to cause the Comex to raise silver margins by 18% after just two up days.

But silver's story is still in its early days. Dramatically, higher silver prices are still squarely ahead.

Here's What Really Happened to Silver

A Reddit subgroup called WallStreetBets sent out a call-to-action to buy silver on January 28th. 

Retail investors piled in en masse and kept doing so on Friday, Jan. 29 and Monday, Feb. 1. 

By Sunday, January 31, most bullion dealers were outright sold out. 

By Monday, February 1, silver was up nearly 8% from the Friday close.

Silver had gained almost 20% in just three trading days.

Silver had soared to an 8-year high. 

Silver stocks were ripping higher, and many were seeing their trading volumes explode anywhere from 6-10 times normal levels.

The Global X Silver Miners ETF (NYSEARCA:SIL) went from $40 to $49 in just three days. 

The ETFMG Prime Junior Silver Miners ETF (SILJ) went from $13.60 to $17.80 in that same time.

On Friday alone (Jan. 29), the iShares Silver Trust (SLV), the world's largest silver-backed exchange-traded fund, added nearly $1 billion of inflows.

Some of this move will turn out to be a short-term speculative buying frenzy. But what this whole saga has done is to introduce a massive new following to the silver space.

More importantly, I believe silver still remains fundamentally cheap.

Silver Supply and Demand Drivers

Huge forces are going to keep pushing silver higher for years to come.

Supply peaked in 2015 and has been falling consistently for the last 5 years.

Not one of the top 10 silver-producing countries has escaped this trend. 

Several consecutive years of low prices have led to underinvestment and underexploration. 

Output has dropped along with reserves. 

According to the Silver Institute, global silver output was down 1% in 2019 year-over-year. (Other reason silver price is soaring: disruptions in Latin America - MINING.COM) 

As well, the Institute estimates that, thanks mostly to Covid-19 shutdowns, mined silver was down again in 2020 by 6.3%, reaching levels not seen for 9 years.

And with 70% of mined silver as a by-product of mining other metals, those miners are not motivated to produce more even when silver rises: it's too small a portion of their revenues.

All this is happening while multiple demand forces are building.

Vehicle demand for silver is soaring. 

Whereas internal combustion engines need 15-28 grams of silver, EVs need double that amount at 25-50 grams per vehicle. 

Globally, EV sales are projected to rise dramatically. 

The Silver Institute projects a 50% rise in automotive silver demand, from 60M oz. currently to over 90M oz. in just 5 years. (Silver Consumption in the Global Automotive Sector to Approach 90 Million Ounces by 2025)

Meanwhile, the solar sector is also likely to boost silver demand. 

It currently represents 100M oz. of silver annually. 

And although efficiencies have been leading to lower silver consumption per solar panel, in my view expanding volumes will more than make up for that.

However, I believe the wild card will be investment demand for silver. 

Even without the dramatic, explosive action in silver markets over the last week, investment demand has been gradually increasing over the last 5 years. 

2019 saw an impressive increase of 12% over 2018. 

But 2020 was an absolute standout, with a 16% increase over 2019. 

None of this happened with any hype.

That translates into global silver ETF holdings now in the 1 billion ounce range.

Consider that these total holdings are the equivalent of a whole year's silver supply: mine production and recycling.

And yet silver remains stunningly cheap, especially relative to gold.

The gold silver ratio has reversed in a dramatic way from its all-time high last March at 125, and has just broken below support at 70. 

I believe it's heading towards 55 or even 50. 

Silver remains cheap on a fundamental basis, a relative basis, and an historical basis.

In the end, this pullback is just par for the course, especially in silver. 

The way I see it, all it does is give us more time and another opportunity to keep accumulating silver and silver miners at discount prices.

The mania stage still lies ahead. This past week was just a small taste of the opening act.

Stay long silver.

The Crisis of American Power

While America's crisis of democracy has been clear to see in recent months, equally consequential is its crisis of power on the world stage, as demonstrated by declining confidence in US leadership among Europeans. If the US' staunchest allies can no longer count on it, who else will?

Mark Leonard

BERLIN – The United States is suffering from a double crisis. 

Headlines in recent months have focused mainly on America’s crisis of democracy, but its crisis of global power may turn out to be more consequential in the long run.

America’s crisis of democracy has been personified in the figure of Donald Trump, the defeated “divider-in-chief” who still commands leadership of the Republican Party. 

His successor, Joe Biden, has embarked on a political project to reunite the country, and has already revived many of the institutions that Trump attacked while in office. 

But reversing America’s deepening polarization and spiraling inequalities will not be easy in a political environment driven by demographic change, media fragmentation, and electoral gerrymandering.

As difficult as it will be to repair America’s democratic institutions, it will be harder still to refurbish America’s global image. Following the Cold War, the US enjoyed a power premium. 

Because friends and foes alike routinely overestimated American interests, the US enjoyed outsize influence in countries and regions around the world.

But thanks to the Iraq War, the 2008 financial crisis, and the Trump presidency, the world no longer places a premium on US power; if anything, it now applies a discount. 

After all, rather than maintaining an interest in the crises of the Middle East, Eastern Europe, Africa, and other regions, the US has pulled back, and other powers have filled the vacuum.

In Latin America, the US can still fulminate against Venezuela’s government, but to little effect. 

In much of Sub-Saharan Africa, China has become the most important player. 

In Syria, Libya, and the disputed Nagorno-Karabakh region of the South Caucasus, it is Russia and Turkey that are shaping the future. 

But most shocking of all are developments in America’s oldest, staunchest ally: Europe.

With the COVID-19 pandemic killing millions worldwide, it was easy to miss the fact that the European Union and China concluded negotiations on a Comprehensive Agreement on Investment in late 2020. 

After seven years of negotiations, the CAI was pushed over the line just weeks before Biden’s inauguration, with the Europeans dismissing public pleas by the US national security adviser, Jake Sullivan, to consult with the new administration first.

By pressing ahead, the EU publicly undercut the Biden administration’s top foreign-policy priority of re-engaging with allies to manage the China challenge together. 

The EU thus squandered the trust of the new US administration (as well as that of Japan, India, and Australia), and emboldened China to pursue a divide-and-rule strategy vis-à-vis the democratic world. 

The signal sent by Europe’s brazen disregard for US interests should send chills down American policymakers’ spines.

It is no less striking that it was German Chancellor Angela Merkel who negotiated the CAI. Merkel is a committed Atlanticist who would not oppose the US even when it decided to invade Iraq in 2003. 

Many Europeans back then were unhappy with President George W. Bush’s administration, and worried that America had too much power. 

Today, the problem is inverted: Europeans are happy with Biden and his China agenda, but fear that America is too weak to pull it off.

In this respect, European leaders are simply acting on what their citizens think. A recent pan-European survey by the European Council on Foreign Relations finds that a majority of Europeans were delighted to see Biden elected, but have deep doubts about America’s capacity to come back as a global leader. 

Similarly, a majority fears that the US political system is broken, and that Americans can no longer be trusted after having elected Trump in 2016. 

Moreover, across the 11 countries surveyed, six out of ten respondents think that China will become more powerful than the US within the next ten years, and at least 60% of respondents in each country surveyed say they can no longer rely on the US to defend them.

The implications for European policymaking are radical. Most Europeans think they should be investing in their own defense, rather than relying on the US; and many now see Berlin, rather than Washington, DC, as the “go-to” capital for leadership. 

Most alarmingly, most Europeans are not interested in the Biden team’s goal of developing a common transatlantic approach to China. 

A majority in each country wants to remain neutral in any future conflict between the US and China. 

This shocking finding first emerged in polling conducted a year ago, when many could dismiss it as a reflection of Europeans’ revulsion toward Trump. That explanation no longer works.

To be sure, opinion polling offers only a snapshot of views at a given moment, and it is possible that European attitudes will evolve as Biden and his team bring America back to the world stage. 

Biden has brilliant advisers in Sullivan, his “Indo-Pacific czar” Kurt Campbell, and many others, and his administration is crafting a tough China strategy that is far more inspiring to US allies than Trump’s bullying bluster ever was. 

As Campbell and Sullivan explained in a 2019 Foreign Affairs essay, they envision “competition without catastrophe” – co-existence without compromising on core values. That is a strategic doctrine all Europeans should embrace.

But a bigger challenge than selling US allies on a China strategy will be restoring faith in America’s might and staying power. 

As the Chinese economy grows, and its links with the rest of the world become more important, America’s own prospects will increasingly depend on its international alliances. 

Securing a balance of power that favors open societies in every part of the world will be at least as important as preserving an open society in America itself.

Mark Leonard is Co-Founder and Director of the European Council on Foreign Relations.