For this week’s newsletter, we look at both long-term trends and recent developments that potentially lend insight into the direction that the world is heading. First, we examine the weak outlook for the Euro area, giving special attention to Germany’s declining status as a hub of industry. Then, we discuss the tragic death of prominent Russian opposition figure Alexei Navalny during a dark time in Europe. We then look at the upcoming elections in Europe as well as the broader trends shaping the democratic world. We end this week by inspecting the way that markets are reacting to delayed rate cuts, as well as how some investors are picking up farmland as a hedge against inflation and instability.

Euro-Area Faces Threat of Depreciating Economy 

Germany’s Days as an Industrial Superpower Are Coming to an End

Bloomberg

Euro-Area Economy Is Losing Momentum, EU Says, Slashing Outlook

Bloomberg

Germany’s days as an industrial powerhouse may be coming to an end. A recent ceremony in Germany marked the end of a 124-year old factory that began in the heyday of German industrialization and weathered two-world wars, but couldn’t survive the aftermath of the energy crisis. This reflects a broader trend of declining manufacturing output in Germany since 2017, with competitiveness eroding. Factors contributing to this decline include global volatility, political paralysis in Berlin, aging infrastructure, an aging workforce, and the education system’s lack of investment. The closure of the factory is part of a larger industrial downshift in Germany, with companies scaling back expansion and investment plans, shifting production lines, and laying off staff. This decline threatens to plunge Germany into a downward spiral, impacting competitiveness in the international market.

The situation in Germany also reflects a broader threat to the Euro-Area economy. The European Union has revised its forecasts for the area, expecting GDP to grow by 0.8% in 2024, instead of the previously predicted 1.2%. This adjustment illustrates a more modest rebound than anticipated, but one that may gradually quicken due to slower price increases, growing real wages, and a strong labor market. The European Commission warns of geopolitical tensions, climate instability, and key elections worldwide as factors increasing uncertainty. Despite the weaker outlook, the European Central Bank maintains its record-high 4% interest rate, though policymakers acknowledge the need for reduced borrowing costs in the coming year. 

Alexei Navalny’s Death Comes at a Dark Time for Europe

Alexei Navalny didn’t just defy Putin—he showed up his depravity

The Economist

What Navalny’s death means for Russia, Putin and the world

The Economist

As Putin Threatens, Despair and Hedging in Europe

David E. Sanger & Steven Erlanger, The New York Times

Alexei Navalny, a lawyer turned blogger turned politician, was a leading opponent of Vladimir Putin’s regime. Despite facing constant harassment, imprisonment, and even a poisoning attempt, he remained unwavering in his fight for a more democratic and just Russia. Initially a liberal supporter of capitalism, he was disillusioned by the rise of oligarchs and dedicated himself to exposing corruption and mobilizing ordinary citizens. Through grassroots efforts, blogs, and online initiatives, he challenged the regime and inspired large-scale protests. He faced trumped-up charges, was barred from elections, and was ultimately imprisoned upon his return to Russia after being poisoned. But even from his cell, he continued to call for change and inspire hope for a different future, believing that “the Putinist state cannot last.” His death in a Siberian prison under suspicious circumstances on February 16th signifies a dark turn for Russia, which is more brazenly deepening repression against other dissidents. It may also serve as a wake-up call for the West, urging them to take stronger action against Putin’s aggression and disregard for human rights, as well as deepening their support for Ukraine in its efforts to resist Putin’s invasion. Navalny’s legacy lies in his defiance and the inspiration he provided. His loss is a tragic blow for both ordinary Russians and the Western world that would benefit from the rise of a more liberal Russia.

Yulia Navalny, the wife of Alexei, took to a stage normally reserved for high-profile politicians to keep up her late husband’s work during the latest Munich Security Conference. The conference painted a stark picture of a West grappling with unpreparedness in the face of Russian aggression. Despite sanctions and condemnation, Russia’s territorial gains in Ukraine, exemplified by the capture of Avdiivka, underscore a new phase in the conflict. European leaders, confronting anxieties about a protracted war and potential Russian belligerence towards vulnerable NATO members, acknowledged the need for accelerated military modernization, but found themselves constrained by slow bureaucratic processes and political barriers. The looming specter of potential US disengagement from Europe, especially in light of Trump’s disparaging remarks about the NATO security alliance, further compounded the sense of uncertainty. While recognizing the shortcomings of their initial response, many analysts believe that Western leaders at the conference struggled to formulate a truly effective counterstrategy, potentially falling flat in the face of a more volatile and rapidly-changing world.

Democratic Decline in a Year of Elections

Where democracy is most at risk

The Economist

Previewing Europe’s 2024 Elections 

Stratfor Global Intelligence

2024 has been named “the election year,” set to witness a historic number of elections. However, the sheer act of voting does not guarantee a healthy democracy, with many upcoming elections expected to face challenges. According to the latest Economist Intelligence Unit (EIU) democracy index, only 43 of the 70 elections expected worldwide this year are projected to be completely free and fair. Norway retains its position as the most democratic nation, while Afghanistan languishes at the bottom for the third consecutive year. Greece has been elevated to full democracy status following successful 2023 elections, but Gabon and Niger have regressed due to coups. Western Europe emerges as the most democratic region, with other regions experiencing declines. The global democratic trend has been on a downward spiral since 2016, with war and internal conflict further eroding democratic principles in 2023. 

Looking ahead, several of the forthcoming elections in Europe have significant ramifications for both domestic and foreign policy in the continent. Elections in Portugal, Belgium, Austria, Romania, and the United Kingdom are particularly significant. Portugal is gearing up for an early parliamentary election on March 10th following Prime Minister Antonio Costa’s resignation amid a corruption scandal. In Belgium, the federal election on June 9th could potentially bring about substantial changes in Flanders, where nationalist parties are gaining traction, raising questions about Belgium’s territorial integrity. Austria’s election in the fall is anticipated to favor the right-wing populist Freedom Party of Austria (FPO), potentially leading to significant shifts in Austria’s foreign policy, particularly concerning assistance to Ukraine and hostility toward migration. Romania’s parliamentary and presidential elections at the end of this year could entail heightened economic risks, along with the possibility of far-right factions entering the government which could potentially fuel inter-communal tensions. Lastly, the United Kingdom’s general election, likely to take place in the latter half of the year, could witness the center-left Labour Party’s return to power after nearly 15 years of Conservative rule. A Labour victory could usher in significant policy changes, including increased state intervention in the economy, improved relations within the EU, and continued support for Ukraine and NATO. The outcome of these European elections will be closely watched to see if they follow the global trend of democratic decline, especially as conflicts, threats to international trade, and other unforeseen risks threaten the security and prosperity of the region. 

Stock Market Shrugs off Sticky Inflation While Investors Look for Long-Term Stability

The Stock Market Is Melting Up. Prepare for a Short-Term Correction.

Nicholas Jasinski, Barron’s

Investors plough record amounts into US farmland

Susannah Savage, Financial Times

Despite stronger-than-expected inflation and shaky retail sales data, the stock market remained resilient last week. The S&P 500 even set a new record high last Thursday, although the Nasdaq Composite fell 1.3%. The inflation data suggests the Fed won’t be cutting interest rates as soon as expected, with June now the new consensus start for the cutting cycle. Some analysts believe the Fed’s wait-and-see approach may be justified due to sticky services inflation. Investors are starting to realize that macro conditions don’t warrant rate cuts soon and might even accept no cuts in 2024 if certain economic conditions persist. However, the market seems to be able to handle fewer rate cuts as a strong economy benefits corporate revenue and earnings. The calm Cboe Volatility Index, Wall Street’s “fear gauge”, also suggests the market may not need immediate rate cuts to survive.

While the market may not need to rely on rate cuts now, some investment firms are focused on long-term trends and finding assets that can keep pace with inflation. One such asset is US farmland, which is attracting record investment due to its potential to outperform in a future with population growth and resource scarcity. The value of farmland held by investment groups has doubled in just 3 years, driven by factors like the pandemic disrupting global food supply chains, the Ukraine war sending food commodity prices sky-high, and rising inflation of food items; all of these trends are cementing agricultural land’s value. This trend is expected to continue as arable land becomes increasingly scarce due to climate change. The average value of an acre of US farmland has risen over 300% in the last two decades as well. Only a small 1-2% of the $3.4 trillion farmland market is owned by investment funds, but family farmers worry about the impact on rural communities and the control of the agricultural land base if these large firms continue to snap up acreage.