To begin this week’s newsletter, we look at the recent EU parliamentarian elections, which saw some gains for the far right, despite the center holding. Then, we examine some concerning trends in financial markets, from the slowdown in consumer spending to potential surprises that could upend the market’s calm. We then move to a discussion of the rising tensions between Israel and Lebanon, which could lead to a wider conflict and sharp consequences for the region. To end this week, we examine the challenges posed by rising nationalism in the West, Russian threats against countries supporting the defense of Ukraine, and the rising humanitarian cost of the Sudanese civil war.

EU Elections Move Parliament Slightly Towards the Right

Have European Voters Hamstrung the EU? | Foreign Affairs 

Matthias Matthjis, Foreign Affairs

In E.U. Elections, the Center Holds, but the Far Right Still Wreaks Havoc – The New York Times 

Matina Stevis-Gridneff, The New York Times

Macron dissolves Assemblée Nationale after EU election setback in highly risky gamble 

Claire Gatinois and Nathalie Segaunes, Le Monde

Germany at a Crossroads – Carnegie Europe 

Judy Dempsey, Strategic Europe

The recent European Union parliamentarian elections have sent ripples of uncertainty throughout the continent, especially in Germany and France. With the far-right gaining traction in several EU member states, there’s palpable tension regarding the union’s future direction. However, traditional centrist parties continue to maintain dominance in the legislative body but are increasingly ceding influence to the periphery amidst growing disillusionment with the status quo. In terms of numbers, the traditional centrist and pro-EU parties still hold 450 of the body’s 720 seats with the center-right European People’s Party increasing its share of seats to 186, putting it in poll position to form a governing coalition as the body’s largest party. However, elections did result in gains for both the far-right and far-left— not enough to become a part of a governing coalition for either side—with the EU parliament shifting slightly further right overall. Leaders will have to grapple with the aftermath of the elections, especially as questions continue to arise about the EU’s ability to navigate complex challenges such as migration, economic integration, and security cooperation in an increasingly polarized environment.

In the wake of these elections, European leaders are faced with critical decisions that could shape the continent’s trajectory for years to come, regarding EU defense, immigration, trade, and climate issues. French President Macron’s decision to dissolve the National Assembly in response to his party’s setback in the European parliamentary elections reflects the urgency of addressing the discontent expressed by voters as well as a high-risk bet on his political future. Macron’s centrist alliance only garnered 15% of the vote while the far-right National Rally party led by his political rivals Marine Le Pen and Jordan Bardella obtained 31% of the vote. Meanwhile, Germany finds itself at a crossroads, grappling with its own domestic political challenges— Scholz’s poor EU election performance and increased polarization— while also facing pressure to provide leadership within the EU. Pedro Sanchez of Spain saw his ruling socialist party lose out to the center-right Popular Party led by Alberto Núñez Feijóo while in Italy Meloni’s right-wing Brothers of Italy Party performed well, highlighting the increasing popularity of the right in the EU’s four largest economies.  As the balance of power within the European Parliament creeps slightly further from the center to the right, the geopolitical implications extend beyond the borders of the EU, impacting global alliances, relationships, and European security.

Uncertainty and Potential Surprises in Financial Markets

Is America’s economy heading for a consumer crunch? 

The Economist

Big Tech Companies Unplug Stock Market From Reality 

James Mackintosh, The Wall Street Journal

Beneath the Calm Market, Stocks Are Going Haywire

James Mackintosh, The Wall Street Journal

The continued spending of American consumers has kept the US economy chugging along, much to some analysts’ surprise. However, there are signs that this spending spree may be coming to an end. Consumer spending growth has slowed down, and credit card debt is on the rise, a situation especially true for low-income earners. Some experts believe that this is a return to normalcy, while others are concerned that it could be a sign of a coming recession. However, there are also positive signs for consumers, such as strong employment and recent inflation numbers, which show it slightly cooled.

At the same time, the strong performance of big tech stocks – which have lifted the performance of the S&P 500 – has masked the anxiety investors have about elevated interest rates. Big tech firms have large cash reserves, insulating them from the high borrowing costs that other firms face in a high interest rate environment. Additionally, the relative calmness of the markets masks a hidden undercurrent of volatility, where individual stocks have experienced swings (such as Salesforce dropping 17% or HP rising 20%) while the market overall stays flat. Analysts believe it may be a good time to look at smaller, undervalued members of stock markets, but warn that this calmness might not last – surprises could range from an unexpected slowdown, geopolitics, or even an AI bust. Experts believe that investors should be on the lookout for these potential upsets and resist being lulled into a false sense of complacency.

Tensions Increase between Israel and Hezbollah, Conflict in Gaza Limiting Aid 

Risk of War Between Israel and Hezbollah Builds as Clashes Escalate – WSJ 

Dov Lieber, The Wall Street Journal

Talk of war between Israel and Lebanon is growing 

The Economist

Starvation already causing many deaths and lasting harm in Gaza, agencies say 

Emma Graham-Harrison, The Guardian

Tensions in the Middle East have reached a boiling point as Israel and Hezbollah move dangerously close to full-scale conflict. Israel and the U.S. designated terrorist organization Hezbollah have engaged in low-intensity conflict in the border region spanning northern Israel and Southern Lebanon since Hezbollah opened up a battlefront in the area in the aftermath of the Hamas attacks on October 7th.  Recent escalations, including tit-for-tat attacks along the Israel-Lebanon border, have raised fears of a devastating war between the two adversaries. The situation is exacerbated by provocative rhetoric from leaders on both sides as well as Hezbollah’s use of explosive drones that are increasingly striking deeper into Israeli territory and Israeli strikes in Sidon. Israel remains concerned about Hezbollah’s medium-range missile arsenal that is likely capable of striking central Israel but is increasing planning for the creation, by the IDF, of a security zone in southern Lebanon akin to the one that was in place until 2000 if forced to. However, a conflict would not benefit either side as Israel continues its military operations in Gaza and Lebanon tries to improve its bleak economic situation. The potential outbreak of hostilities would not only threaten Israel and Lebanon, but it would also likely engulf the entire region in violence, destabilizing neighboring countries and drawing in regional and international powers, heightening the risk of a broader conflict with far-reaching consequences.

Amidst this tense atmosphere, the humanitarian situation in Gaza continues to deteriorate. According, to two United Nations organizations, more than one million people in Gaza were expected to face death and starvation by mid-July. The dire conditions in Gaza, exacerbated by a blockade and intense fighting between the IDF and Hamas, highlight the urgent need for international intervention to address the humanitarian crisis. As tensions escalate elsewhere in the region, the plight of Gaza’s residents serves as a stark reminder of the human cost of the conflict. Since May, Israel has allowed new crossings to open up in northern Gaza, slightly improving access to food and supplies but increased military operations in the south and central portions of Gaza limit the complicate the ability to get needed aid into those areas. Without swift action to alleviate the suffering in Gaza and de-escalate tensions across the Middle East, the region risks descending further into chaos and devastation, with potentially catastrophic consequences for its people and the wider world.

Global Conflicts Present Challenges West Must Rise to Meet

Nationalism threatens the world order

Martin Wolf, Financial Times

Putin threatens to arm countries that could hit Western targets 

Le Monde

Sudan crisis: Fears of potential genocide growing

Kersten Knipp, DW

As geopolitical tensions rise around the global, from the ongoing war in Ukraine to the escalating conflict in Sudan, understanding the threats that this potential unraveling of the world order is more important than ever. The potential return of Donald Trump to power in the US is a worrying sign, especially considering his isolationist tendencies, which could lead to a US withdrawal from Europe, similar to what happened after WWI. The war in Ukraine highlights the importance of US commitment to European security, and China’s support for Russia strengthens the case for US engagement abroad. The rise of nationalism also leads to protectionist trade policies, harming global cooperation.

Threats coming from Putin, who has warned the West that the use of western arms by Ukraine to strike targets within Russia constitutes a “dangerous step”, highlight the precipice on which the world finds itself. In return, Russia’s president said that Moscow could arm other countries with long-range weapons to strike Western targets. Meanwhile Sudan finds itself on the verge of a horrific humanitarian crisis fueled by the brutal civil war between the Sudanese Armed Forces (SAF) and the paramilitary Rapid Support Forces (RSF), where millions of Sudanese face imminent famine. Both parties are resorting to increasingly brutal tactics, such as ethnic attacks and massacres. International actors, such as Egypt, Saudi Arabia, Iran, the UAE, and even Russia (via the Wagner Group) fuel the conflict, each looking to further their own interest in the region. Overall, the West must rise to the challenges that these crises present, and it needs to prioritize its survival as a community of democracies to counter these rising threats to the global order that cost so much to create in the aftermath of the second world war.