To begin this week’s newsletter, we look at the upcoming elections in France in which right-wing parties may pose a threat to European stability. Then, we examine recent geoeconomic anxieties, from the question of how long the US economy can go with high interest rates coupled with eye-popping valuations of AI companies, along with worries about the US dollar’s position as the dominant global reserve currency. We then move to a discussion of the lack of strong leadership in Europe, focusing particularly on British politics and the UK’s upcoming election. To end this week, we examine the scope to which AI will change warfare, touching also on the energy cost that the expanded use of AI is levying on electric grids.

French Elections Create Uncertainty

France Keeps Markets on Edge With Le Pen Fighting Left for Power 

William Horobin, Alice Gledhill, and Michael Msika, Bloomberg

France’s middle class feels downgraded and is turning to the far-right 

Beatrice Madeline, Le Monde

How bad could things get in France? 

The Economist

France’s unbalanced power structures are storing up trouble 

Shahin Vallee, Financial Times

Political and economic uncertainty looms in France as President Emmanuel Macron’s decision to call a snap election introduces the potential for significant shifts in economic policy, with Marine Le Pen’s and Jordan Bardella’s far-right National Rally (RN) party looking increasingly likely to win the election as they compete against Macron’s centrist or a leftist alliance vying for control of the National Assembly. This election is crucial for investors, as outcomes could lead to divergent fiscal policies impacting France’s bond market stability and broader European economic cohesion. The scenarios range from potential gridlock with moderate fiscal adjustments under Le Pen, to more radical fiscal expansions and confrontations with the European Union (EU) under a leftist victory, highlighting the election’s pivotal role in shaping France’s economic trajectory and overall market dynamics.

The notable shift in support for the RN party is largely due to rising dissatisfaction among France’s middle class, exacerbated by economic pressures and perceived political neglect. This trend was evident in the recent European elections, where RN leader Jordan Bardella’s list secured 31% of the vote against Macron and his party’s 15%, doing particularly well among middle-income households feeling marginalized and unrepresented. The RN also increased its share of votes from white-collar employees by 10% and intermate professions by 15%. The surge in RN’s popularity reflects broader socio-economic anxieties compounded by unprecedented inflation rates, challenging traditional political loyalties and highlighting a growing disconnect between citizens and established institutions. With France now under scrutiny in an excessive deficit procedure by the European Commission, with a deficit that’s 5% of GDP and a debt-to-GDP ratio of 111%, the looming question is how economic policies could change under a potential RN-led government, particularly with Marine Le Pen eyeing the presidency again in 2027.

Market Dysfunctions and the Threatened Dollar?

How Long Can High Rates Last? Bond Markets Say Maybe Forever 

Liz Capo McCormick & Ye Xie, Bloomberg

Top Dollar: Why the Dominance of America’s Currency Is Harder Than Ever to Overturn 

Eswar Prasad, Foreign Affairs

Nvidia’s Ascent to Most Valuable Company Has Echoes of Dot-Com Boom 

Asa Fitch, The Wall Street Journal

What signifies potential market dysfunction? Perhaps it is the fact that some investors are optimistic about a bond rally due to cooling inflation and labor market, potentially leading to Fed rate cuts. However, the market believes the neutral rate, where interest rates neither stimulate nor slow growth, is higher than the Fed predicts. This could limit the Fed’s ability to cut rates and put a damper on how high bond prices can go. The strong economy and resilient stock market also suggest, according to some analysts, that the Fed’s current policy may not be restrictive enough. Another example of a potential market dysfunction is Nvidia’s rise due to the artificial intelligence (AI) exuberance that permeates the markets which has made it the world’s most valuable company. Some experts believe that the AI boom has troubling similarities to the internet boom of the early 2000s – such as the extreme imbalance of money invested into AI companies versus revenue made by those companies – and that the AI hype may be a bubble that is on the verge of bursting.

Partly due to all of these anxieties, as well as a deepening entrenchment of geo-economic fragmentation, some doomsayers believe that the American dollar is in danger of losing its rank as the world’s reserve currency. While the vast majority of international trade does take place in US dollars, many countries are making noise about wanting to reduce their reliance on it. However, some experts argue that, despite weaknesses in the American system (the rise of populism, the dearth of fiscal responsibility and leadership), the strength of the greenback as a reserve currency lies in the weakness of other systems. The US economy is still the largest, strongest, and most stable in the world, and it is likely that there is no other currency that, at the moment, could take on the task.

Where are the Great Leaders in Europe?

Europe today is a case of lots of presidents yet nobody leading 

The Economist

Rishi Sunak’s comedy of errors – New Statesman

John Elledge, New Statesman

Brace for the most distorted election result in British history 

John Burn-Murdoch, Financial Times

In today’s European Union, a proliferation of presidential figures belies a glaring absence of effective leadership, exacerbating a significant power vacuum amidst internal discord and global challenges. From Emmanuel Macron’s disruptive snap election maneuver to the historical uncertainties surrounding EU governance, the continent struggles with decentralized authority amid shifting Franco-German influence and the rise of nationalist movements. Meanwhile, Rishi Sunak’s recent political blunders, including his premature departure from the D-Day ceremony for a non-live interview, underscore questions about his leadership competence, overshadowing his attempts to shape public discourse. His series of misjudgments, from media gaffes to alienating voter bases, has sparked criticism and raised doubts about his capacity to lead as prime minister and garner the support needed to fend off what is likely to be a Labour landslide in upcoming elections.

Looking ahead in British politics, the UK’s impending general election on July 4th threatens to yield the most distorted electoral outcome in its history under the first-past-the-post system. Despite potentially lower vote shares than they secured in the 2017 general election, Labour could secure a commanding majority and win up to 450 seats out of 650 in the House of Commons, while the Liberal Democrats might emerge as the official opposition due to the system in place. These potential outcomes underscore systemic flaws with the new election system that prioritizes regional support over broad electoral mandates, fueling calls across the political spectrum for electoral reform to ensure a more accurate reflection of voter preferences and greater political stability in Britain.

AI’s Increasing Use in Warfare and the Environmental Threat it Poses

AI will transform the character of warfare 

The Economist

How AI is changing warfare 

The Economist

AI’s looming climate cost: Energy demand surges amid data center race – Nikkei Asia

Yifan Yu, Nikkei

Artificial intelligence (AI) is poised to revolutionize warfare, accelerating operations and transforming strategic landscapes, yet its integration raises profound ethical, legal, and operational challenges. Advances in AI-driven technologies, propelled by recent conflicts such as those in Ukraine, promise unprecedented capabilities in autonomous drones, decision-support systems, and command and control (C2) structures. These innovations enable faster target identification and engagement, reducing human involvement in lethal decision-making to oversight of AI systems. Initiatives like the StormCloud demonstration, commissioned by the British Royal Navy and developed by a consortium including tech giants (Amazon Web and Microsoft) and defense contractors (including BAE Systems and Anduril), demonstrate AI’s capability to integrate diverse military assets like human combatants, drones, and satellite data into a seamless operational network, enhancing combat effectiveness significantly. However, this shift may heighten the opacity of military actions and complicate global security dynamics, favoring entrenched defenders and necessitating substantial AI infrastructure investments by major powers like the US and China.

Simultaneously, AI’s impact on warfare extends beyond combat to encompass critical support functions such as maintenance prediction, logistics optimization, and personnel management, offering potential cost savings and operational efficiencies for armed forces worldwide. Despite these benefits, AI’s escalating energy consumption due to the proliferation of data centers poses significant climate risks, including increased carbon emissions and environmental vulnerabilities like wildfires and extreme weather events. China leads the way in data center proliferation with 449, significantly more than second-place Japan with 220. The Asia-Pacific market for data centers is also expected to reach $48 billion by 2028 compounding annually by 12% to reach that figure. Meanwhile, in terms of energy consumption per individual use of AI platforms, a single search query on OpenAI’s ChatGPT could consume between 50 to 90 times more electricity than a traditional Google search. While efforts by tech giants to adopt renewable energy sources and enhance AI efficiency are underway, regulatory frameworks addressing AI’s environmental impact in the Asia-Pacific region and beyond remain nascent, underlining the urgency for comprehensive international standards and ethical guidelines to govern AI’s role in future conflicts and its environmental footprint.