To begin this week’s newsletter, we examine Mario Draghi’s recent report on the European Union’s economy, and the suggestions that he makes to better position the bloc for the future. Then, we touch on the headwinds facing the US economy, from the disinversion of the yield curve to the rough patch that stock markets have recently hit. We then move on to look at the civil war in Sudan, the status of the war, and the outside actors that are influencing the conflict’s trajectory. We end this week’s newsletter by looking at the dangers of using AI without considering its consequences.

Mario Draghi’s Plan for Europe’s Future

Can Anything Spark Europe’s Economy Back to Life?

The Economist

Draghi Says EU Itself at Risk Without More Funds, Joint Debt 

Jorge Valero and Andrea Palasciano, Bloomberg

Mario Draghi outlines his plan to make Europe more competitive 

The Economist

Mario Draghi confronts the EU’s merger police

Henry Foy, Javier Espinoza & Paola Tamma, Financial Times

Mario Draghi’s latest report, some four hundred pages, on the EU economy offers a comprehensive, strategic plan for Europe’s economic future, calling for up to €800 billion in annual investments to maintain competitiveness in the face of global powers like the US and China. Draghi, the former president of the European Central Bank and Italian Prime Minister, highlights the existential risk to the EU if it fails to innovate across key sectors, including advanced technology while combining climate goals with competitiveness and strengthening the EU’s defense industrial capacity. Without bold steps to close the innovation gap, particularly in areas like AI, Europe risks economic stagnation and geopolitical irrelevance. Draghi stresses the need for a unified and well-funded approach to innovation, calling for joint public investments and a regulatory overhaul to facilitate the commercialization and scaling of cutting-edge technologies within the EU market. His report also urges the EU to bring its fragmented markets together to exploit its scale, increase funding for riskier (but potentially more rewarding) ventures, and boost innovation.

However, Draghi’s ambitious vision faces significant political hurdles, especially from fiscally conservative nations like Germany and the Netherlands, which resist deeper fiscal integration and common debt issuance. While his recommendations have found support from European Commission President Ursula von der Leyen and others, divergent national interests present a formidable barrier to implementing his proposals. In his report, Draghi also critiques the EU’s current competition policies, arguing that they prevent innovation and progress in key sectors such as transportation, technology, and energy. He proposes a more flexible approach to mergers, allowing for greater industrial consolidation to compete globally. These proposals have sparked debate, with some officials worried about reduced competition and higher consumer prices, while others recognize the necessity of reforming Europe’s competition framework to remain competitive in the evolving global economy.

Headwinds for the US Economy

The Yield Curve Is Disinverting. Why Should I Care? 

Greg Ritchie & Liz Capo McCormick, Bloomberg

Risk-On Momentum in Stocks Succumbs to Mounting Growth Worries

Jan-Patrick Barnert, Sagarika Jaisinghani, & Natalia Kniazhevich, Bloomberg

September Is Once Again a Tough Month for Stocks

Hardika Singh, Wall Street Journal

The US economy is experiencing a challenging trajectory as the disinversion of the yield curve, a reversal from its previous inversion, raises concerns about a potential economic downturn. Historically, yield curve inversions have signaled recessions, and while the market avoided one after the 2022 inversion, the return to a normal upward slope now suggests the possibility of an impending slowdown. This disinversion comes at a time when investors are increasingly anxious about the health of the economy. The recent weaker-than-expected U.S. payroll report has fueled concerns that the labor market is cooling, contributing to broader worries about U.S. economic growth. As the Federal Reserve approaches its next policy decision, expectations for a rate cut are mounting, though the exact magnitude remains uncertain.

On the stock market front, the S&P 500 has faced headwinds after a robust start to 2024, up 13% year-to-date despite a sharp August sell-off. Concerns about growth in major economies like China and Germany, along with geopolitical uncertainties and concentration in big tech stocks, have led to increased volatility. Key players such as Nvidia have seen significant stock declines, with investor sentiment shifting toward more defensive sectors. Frothy valuations and the potential for a deeper market correction remain risks, especially as investors brace for additional economic data and the Federal Reserve’s upcoming decisions on interest rates. The current market sentiment suggests that the best days of the 2024 rally may have passed, and experts predict that volatility is likely to persist as the year progresses.

Civil War in Sudan has Global Reach

How Sudan’s devastating civil war became a global battleground 

Andres Schipani, Financial Times

Why Sudan’s catastrophic war is the world’s problem  

The Economist

Since the outbreak of the Sudanese Civil War on April 15, 2023, the conflict between the Sudanese Armed Forces (SAF) and the Rapid Support Forces (RSF) has wrought severe humanitarian and geopolitical repercussions. The war, which pits the SAF, led by General Abdel Fattah al-Burhan, against the RSF commanded by Mohamed Hamdan Dagalo, or Hemeti, has resulted in over 150,000 deaths and displaced more than 10 million people—about a fifth of Sudan’s population. The RSF, accused of ethnic cleansing, has gained control of large territories, including much of Darfur and areas around Khartoum. Meanwhile, the SAF has retreated to Port Sudan, grappling to regain control.

The conflict has attracted significant international interest due to Sudan’s strategic location near the Red Sea and its rich gold resources. Countries such as Russia, the UAE, and Iran have become involved, providing arms and funding to various factions, complicating efforts for a resolution. The UAE, despite claims of neutrality, is suspected of supporting the RSF due to concerns about Islamist influence, while Russia has strengthened ties with the SAF, reportedly providing military training and support. This war’s geopolitical significance is heightened by Sudan’s proximity to the Suez Canal, a crucial global trade route, and the potential for broader regional instability reminiscent of past conflicts in Libya and Somalia. The ongoing violence, characterized by widespread atrocities and a severe humanitarian crisis, highlights the urgent need for international intervention and a lasting peace accord, though such prospects remain elusive amidst the entrenched positions of the warring factions.

AI, the Truth, and Global Pursuit of New Technology

Japan Tries to Reclaim Its Clout as a Global Tech Leader

Patricia Cohen & River Akira Davis, The New York Times

The information wars are about to get worse, Yuval Noah Harari argues

The Economist

Yuval Noah Harari’s book “Nexus” critiques the naive belief that more information inherently leads to truth, arguing instead that information’s value lies in its ability to connect and organize people and ideas. He explores how historical information technologies, from stories to AI, have shaped human networks and social order. Harari warns of the political and societal risks posed by AI, likening it to a new form of superhuman authority with the potential to create dangerous myths and exacerbate existing issues like algorithmic bias and cyber-attacks. He emphasizes that decisions made about AI today will have profound future consequences, warning that the centralization of information into the hands of algorithms could lead to new forms of authoritarian control and misinformation.

Meanwhile, other actors race toward the new technology in the name of geopolitical strategy. Japan, in a concerted effort to reassert itself as a global technology leader, has embarked on an ambitious industrial policy focused on the semiconductor industry, leveraging both domestic and international collaborations. Central to this initiative is the Rapidus Corporation’s semiconductor factory in Chitose, Hokkaido, a groundbreaking project launched in 2023 in partnership with IBM. This factory, poised to produce advanced 2-nanometer chips, is part of a broader $27 billion government investment aimed at revitalizing Japan’s tech sector, which had seen its semiconductor market share plummet from over 50% in the 1980s to under 10% in recent decades. The initiative reflects Japan’s strategic shift from its previous inward-looking policies to a more outward-facing approach, marked by significant foreign partnerships and governmental support. This includes subsidies introduced in 2020 to incentivize domestic production and a more aggressive industrial strategy set forth in 2021, designed to counter the global technological competition intensified by the rise of China. Despite some skepticism regarding the ambitious timelines and the level of private investment, Japan’s government remains steadfast, viewing the semiconductor sector as crucial to its global tech resurgence and economic future, notwithstanding the cautious attitude many have towards its potential consequences.