Merlin Weekly Macro: NATO’s disunited ‘Band of Brothers’

How a simple photograph can become a metaphor for the travails and vicissitudes of the western democracies. That now notorious line-up of the four leaders representing the US, UK, France and Germany in their photoshoot on the threshold of Omaha Beach in Normandy was pregnant with multi-layered messages.

Band of Brothers

The photo was designed to portray unanimity, solidarity and harmony, a common sense of purpose.

Consider the context: world leaders, the last surviving veterans and their families congregating on the 80ᵗʰ anniversary of the Normandy Landings. They were there to commemorate in the west the opening of the Second Front in June 1944 which, paired with the Soviets pushing in from the east, would help deliver the unconditional surrender of Nazi Germany and with it, the eradication of fascism from Europe.

At the lectern, Sleepy Joe Biden was temporarily alert, temperamentally on fire. He delivered a tub-thumping speech intended as much for US domestic consumption in an election year as it was aimed at the gathered assembly and stiffening the sinews of the world beyond. It was about bravery and sacrifice; it was about international obligations and neighbourliness (taking a firm swipe at Trump in references to ‘no time for isolationism’); it was about holding up the ‘torch of freedom’, of democracy and the power of good over evil; it drew heavily on the fact that today, 80 years on, significant conflict and misery are present with us again in Europe as Ukraine is daily pulverised by an overbearing aggressive Russian bully; it declared before all that NATO is absolutely united, and strengthened by the recent accessions of Finland and Sweden. It was stirring stuff; and just to remind us that the business was not only peace but war, Biden was visibly moved when in tight formation, four F-35 jets overflew the crowd with one lifting away almost vertically, up to the heavens to honour the ‘missing man’.

But back to earth. Let us start unpicking the photo, peeling away the glossy sheen to see what lies underneath.

Four? Make that three and a hanger-on

First, it was not four leaders at all: it was three plus British Foreign Secretary David Cameron. Rishi Sunak had already ensured his electoral prospects were really sunk by disrespectfully evacuating from the landmark beach early: a greater priority was rectifying a self-inflicted negligent discharge of a gun to the foot about Labour’s tax policy necessitating a trivial media interview back in Blighty. Second, of course, is who was not in the photo: Putin. David Dimbleby’s excellent new book is deliberately ambiguously titled, “How Russia Won the War”; if Russia was at least half the contribution to the Allied victory in 1945 as a result of which it retained total control of all of Eastern Europe for half a century (including Poland over which Britian and France went to war with Germany in the first place), today its invasion of Ukraine makes it a pariah and Putin persona non grata. In any case, there is an international arrest warrant out on him for war crimes: he would have been remanded in custody faster than you can say ‘Overlord’ had he set foot in France.

Standing alongside France’s President Emmanuel Macron, and next to him Germany’s Chancellor Olaf Scholz (two European partners with little mutual warmth, even less in common and frequently at loggerheads over key policy areas), reminds us that it was Cameron in 2016 who failed in his bid to keep the UK in the European Union, something for which Macron made plain we should be the poorer and punished; it cost Cameron his job.

Your best friend or my best friend? Depends on who’s asking and when

Here in the UK we like to think of the ‘Special Relationship’ between us and the United States. It was Churchill (he had an American mother) who first invoked the term with Roosevelt in early 1944, recalling the common ancestry and shared values of the two great anglophone peoples especially in their joint struggle against the tyranny of the Axis powers.

The extent to which it remains either ‘special’ or enduring is less a factor of history, more one of personal relationships and time-to-time political convenience. It has had its ups and downs along the way, but today America sees nothing much special in it at all. In the post-Brexit negotiations, President Biden, clearly against Brexit, statedly pro-EU, and with his strong Irish Catholic background and empathy, made little attempt to disguise favouring the Irish Republic position in the fractious talks encompassing the Northern Ireland Protocol and the Windsor Framework; the US was supposed to be the neutral guarantor of the Good Friday Agreement (GFA), rather than a partisan participant in putting one country’s interests over the other’s. One could have been forgiven for thinking otherwise but the EU was never a party to the GFA. Biden also refuses to entertain a trade agreement with the UK. If Biden’s antipathy towards the United Kingdom was in any doubt, at the post ‘D-Day 80’ state visit to Paris, he declared to Macron (or ‘McCrone’ as Biden persistently mangled the pronunciation of French President’s name) that France was America’s ‘first friend’, emphasising not once but three times that were it not for France, America would never have been freed from the yoke of British rule; Biden describes himself a ‘child of the Revolution’. Time to move on, Joe, let bygones be bygones; in two years’ time America will have been independent for exactly a quarter of a millennium: surely you can’t still be resentful and feeling insecure after 248 years and when the US has been indisputably Top Nation for 79 of them and more importantly still is.

But in these diplomatic tangles, realpolitik is never far beneath the surface. Macron will remember bitterly being publicly and painfully jilted in 2021 when France was dumped by Canberra as the preferred supplier of a new fleet of nuclear powered submarines to the Royal Australian Navy in a contract worth €47bn, as the US repositioned its strategic emphasis towards the Indo Pacific region in the AUKUS pact with Australia and the UK; those boat contracts have gone to British and American yards, a process that was handled cack-handedly by Biden and Boris with Macron. On the other hand, Biden and Macron sank the prospect of Britain’s former defence secretary Ben Wallace becoming NATO Secretary General in succession to Jens Stoltenberg: Biden because he resented being bounced by Wallace (and Mark Rutte of Holland) into training Ukrainian F-16 pilots and allowing jets built under licence to be donated to Kiev; Macron for no better reason than Wallace was British, part of the continuing Franco-Brussels vendetta for Brexit, and more specifically (and not unreasonably) because of his direct part in the AUKUS farrago.

Zelensky looked Biden in the eye and thought, ‘you..….’ (he was too polite to say)

The extraordinary President Zelensky was present at the international commemorations. With his back to the wall on the war front, he had to display even more extraordinary powers of self-restraint. In the presence of the Fab Photo Four and in front of the world’s media, he had no choice but to grin and bear it. He needs them. But subliminally, he would be forgiven for thinking: “my people are dying, on our own account and yours. Our country is being destroyed. Yet you and I, we look each other in the eye and swap pleasantries. You talk a good game. But you know that I know that the whole lot of you are dissembling charlatans”. Whether on Ukraine or NATO, the evidence speaks for itself.

Joe Biden: ‘no time for isolationism’; a powerful point well made (a very different stance on trade however, where Biden’s Inflation Reduction Act is wholly protectionist). But as for NATO unanimity and holding up the torch for freedom? It was Biden who unilaterally cut and ran from Afghanistan in 2021 without any, not one iota, of a reference to his ISAAF/NATO allies also holding the fort. He pulled the plug on them and the Afghans and Afghanistan went down the drain, plunged into a new darkness under a totalitarian, repressive regime.

As for seeing off the bullies, being firm and robust, was it not Joe Biden in January 2022 who said that a Russian incursion into Ukraine would be acceptable, so long as it didn’t go too far?   Protecting those who need help? Sure! With strings: facing existential threats, the Israelis and the Ukrainians will tell you all about American strings, especially when US assurances are Iron Clad, or here-are-a-few-missiles-but-this-is-how-you-will-not-use-them. Sometimes the Americans might do nothing at all despite being bound to underwrite security assurances. They lightly discarded their direct obligations to protect the sovereignty of Ukraine and the sanctity of its borders under the Budapest Memorandum both when Crimea was annexed and when Putin invaded.

And then to cap it all as Biden gripped Zelensky’s hand in front of the world’s TV cameras and shamelessly looked down at him, eyes locked, it was only three days after declaring in a recorded interview that he would not allow Ukraine to be ‘Nato-ized’: first because he said explicitly that Ukraine is still a corrupt state, and second because informed speculation is that Ukraine’s future membership of NATO will be a bargaining chip with Putin when it comes to any negotiated peace deal.

Superficially impressive, Biden’s Omaha Beach performance was pure sophistry. Perhaps it was in this light of embarrassment over the 2024 $60bn aid package to Ukraine being delayed by six months in Congress, and his personally pulling the rug from under Ukraine’s future adoption into NATO that Biden felt compelled to make amends and soften the blow with a 10-year arms-and-training defence pact with Zelensky at the G7 in Puglia. It is an important boost for the Ukrainians. To what extent it still has American strings attached to the use of munitions and whether it survives a potential Trump administration remains to be seen.

Emmanuel Macron: it is only in the last two months that France has made military aid of any significance available to Ukraine as Macron transmogrifies from arch dove and appeaser to arch hawk. A year ago, Macron and EU Commission President Ursula von der Leyen were withholding the supply of EU artillery shells to Ukraine when they determined that domestic Brussels housekeeping integrating defence procurement was much more important (even now only half the pledged supply of EU shells for this year will actually be delivered in 2024). War? In Ukraine? Dying in their thousands? They can wait.

In the lead-up to the Russian invasion and after, completely against Zelensky’s stated war aims and without any consultation with him, Macron was in regular dialogue with Putin about a peace plan that involved Ukraine surrendering a fifth of its territory.

Biden’s ‘NATO more united than ever’? As the camera cut away at that point in Biden’s speech to the French President, perhaps the producer already had it in mind to focus on Macron as a nod to those of us who remember his 2019 statement that “NATO is brain dead” and how subsequently he has been at the centre of trying to disintermediate the US in NATO in favour of a break-away pan-EU defence protocol. He and Biden are in open disagreement about how the Gaza conflict should be concluded.

Olaf Scholz: after a low start pledging 5000 helmets, Scholz has earned some redemption with Germany now being the second largest military aid donor to Zelensky. However, like the US and fearing unwarranted escalation, Germany refuses to allow its Taurus long-range missiles to be used against targets inside Russia. While Scholz’s stance against Putin has hardened, there remains the lingering suspicion that once the dust settles, Berlin would like to see German-Russian trade ties restored. While NATO’s summit last year in Vilnius agreed that Ukraine should be on the path to join the alliance, it was since the conflict began that Scholz pledged a guarantee to Putin that he personally would veto any attempt to allow Ukraine to join NATO. While not able to afford looking a gift horse in the mouth, Zelensky will have that one filed away in his long-term memory.

David Cameron: when prime minister in 2014 Cameron’s response along with Obama’s to the annexation of The Crimea was nugatory despite the UK being party with the US to the Budapest Memorandum. And he could hardly consider himself a force for good in the Arab Spring when he led the destabilisation of Libya with all the consequences with ISIL and others that are still relevant throughout the Middle East today.The savage cuts to UK defence forces in the 2010 Strategic Defence Review did not in themselves cause Russia to take offensive actions in Europe; but there can be no doubt that when weighing up the options and the likely western response, Putin will have been able to conclude that the UK was one factor he could worry far less about in terms of direct military action or intervention.

As prime minister from 2010-2016, whether on defence, Europe, the Arab Spring and the Middle East, Russia and the Crimea, China and the Foreign Office’s ‘Operation Kow-Tow’, Cameron’s was a long and almost unbroken record of bad decisions and worse judgement.

NATO united? Case unproven

As we have said in previous columns, NATO has come a long way in two years towards restoring its common sense of purpose. It has taken a war in Europe to do it. But among its 32 members there is still a wide spectrum of opinions about how best to help Ukraine, even about what is the end goal. How much should members be spending on defence as a percentage of GDP? 2% might be the agreed minimum but it is clear that given the current state of western defence preparedness, particularly in Europe, a multiple of 2% by every country is necessary to come close to achieving full mitigation against an all-out war with Russia and to contain the growing threats from China, Iran, North Korea and other non-state players. Jens Stoltenberg’s already extended term as Secretary General expires this autumn and the membership absolutely must agree on his successor; even without a potential Trump presidency, NATO is in one of the most sensitive periods of its existence when firm, effective leadership is at a premium; history says that those who wish us harm are only too ready to take advantage of our missteps, divisions and weaknesses. The next summit in Washington on 8-11 July is one which must deliver rock solid unanimity, clarity and resolve to see off the threats.

That photo: a study in political mortality

And mention of Trump leads to the final observation of that foursome in the photograph: every single one of them is under the political cosh. Cameron is representing a government on course for a parliamentary defeat quite possibly of historic proportions in less than three weeks’ time.

The European elections last week dealt a significant blow to Macron and Scholz, both at the hands of the strong far-right lurch among their domestic electorates, in the case of France precipitating a snap parliamentary election to be held before the Olympics; with Le Pen’s National Rally party being sympathetic to the Kremlin, the result in parliament could heavily circumscribe Macron’s ability to provide French aid to Ukraine. As for Scholz, despite his SPD trailing a bad third behind the Christian Democrats and the far right AfD, he has no intention of calling a premature election but his wobbly administration is time-stamped to expire no later than October 2025; in the meantime there are a number of state elections pending (Saxony, Thuringia, Brandenburg and the mayoralty of Hamburg) which will indicate the direction of the political wind for the autumn 2025 federal election.

Finally, the US election on November 5ᵗʰ: Biden’s defeat is no foregone conclusion even though he is consistently trailing in the polls. However, if Trump is victorious, and he remains determined that all US aid to Ukraine will stop, the consequences are significant. This week’s G7 summit has agreed new aid financing: using the interest on the $327bn of sequestered Russian reserves frozen under sanctions to raise $50bn of war bonds/loans to help bridge the shortfall if America turns off the funding taps (it will be curious to see who guarantees the issues on redemption or the loans on maturity, notably if they become an annual event: clearly while the $327bn capital sum is legally frozen and untouchable, as collateral it is worthless, but unless these become grants or gifts, lenders will want their money back).

So what? The investment perspective

If all this appears remote, of relevance only to geopolitical analysts and historians, in fact there is a real investment impact. In the last week, since the European elections and the shock response by Macron catching everyone off-guard, the increased political risk has been reflected in a weaker euro against the dollar and an expansion in the yield spread between French and German government bonds (there are no centrally issued European bonds to use as a benchmark). While it is certainly true that government bond yields are much more directly susceptible to economic inputs and speculation about future monetary policy changes, reflecting the perceived underlying stability or volatility of the political outlook there is still a premium or discount attached over time as investors weigh factors other than inflation and interest rates into their calculations.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.