Good Morning,

 

Trilateral Security Pact
The big news overnight is that of a trilateral security pact between Australia, the UK and the US. The polygamous relationship has been given the pet name AUKUS and the most significant outcome of the partnership is that Australia will use US tech and UK expertise to help them build a fleet of nuclear powered submarines – with everyone being clear that these will only be nuclear powered and not nuclear armoured submarines. There will also be a lot of cooperation on defense technologies such as artificial intelligence and quantum computing. The move is designed to bolster defenses in the Indo-Pacific region, which basically means countering the growing dominance of China in the region. The Chinese embassy in Washington have said that countries “should not build exclusionary blocs targeting or harming the interests of third parties… in particular, they should shake off their Cold War mentality and ideological prejudice”. The move is an interesting shift in dynamic for the Sino – US power balance as it now moves it to Sino – US+Allies, with Australia sitting very much on the doorstep of the region.
Still, it’s not an entirely inclusive collaboration: New Zealand weren’t invited to be a part of it and they’ll also prohibit Australian nuclear powered submarines from entering their waters. Additionally, Australia did have a $50bn deal to purchase a dozen submarines from France’s Naval Group. This deal has been torn up which has understandably angered the French who have accused Australia of acting “contrary to the letter and spirit of the co-operation” between the two countries. French foreign minster Jean-Yves Le Drian was also unhappy about the EU being excluded from the deal saying that such a move showed “a lack of coherence that France can only note and regret… (and) only reinforces the need to make the issue of European strategic autonomy loud and clear”.

 

The Need for Europe to ‘Step Up To The Next Level’
As if by coincidence, the EU’s Ursula von der Leyen spoke earlier in the day of the need for Europe to “step up to the next level” with its own military capabilities and reduce their dependence on NATO, rekindling the debate of whether there should/would be a future EU army. At the moment Europe has its own ‘rapid reaction force’ of 1,500 soldiers, but they haven’t ever been deployed. Ms von der Leyen believes that this needs to change and that both the shortfall of capacity and the political will to act independently of NATO and the US needs to be addressed. It’s not all about arms though; in her address the Commission president also wants to use soft power (and money) to counter the influence that China is buying with their ‘Belt and Road’ global infrastructure initiative. The EU Global Gateway initiative will deliver “investments in quality infrastructure, connecting goods, people and services around the world”. Differentiating the plan from China’s, the EU “want to create links and not dependencies” – the problem is going to be that Europe might have a better strapline than China, but China has thrown more than $500bn at these projects to date and is still hungry for more. Europe simply can’t afford to compete at that level, even if it is offering a potentially fairer deal for the investees.

 

UK
Back to the UK: There’s been a fire at one of the power connector sites that run across the English channel, which risks reducing energy supplies from France by as much as two thirds. Of the 3,000 megawatt capacity, 1,000 is unaffected, and of the remaining 2,000 half could be back online by next Friday but the other half might take until March next year to resolve. The initial news sent a spike in gas prices of up to 20%, but they have softened back after the news that some capacity will be back online this month, but energy prices are still hovering around record levels and we’re now facing a power crunch at the worst possible time.

 

Boris Johnson swung the axe in cabinet yesterday and organised a pretty significant reshuffle. The biggest casualty did look like Domonic Raab, but his demotion from foreign secretary was softened by being given Justice Secretary and Lord Chancellor, with deputy PM thrown in for good measure! Mr Raab had to go after he chose the beach over getting back to handle Afghanistan’s collapse and has been replaced by Liz Truss. Gavin Williamson was removed as education secretary which was cheered by many and has been placed by Nadim Zahawi who was parachuted in as ‘vaccines minister’ to sort Matt Hancock out late last year and is now going to be on clean up duty in the education system. Notably, Rishi Sunak stays in his post despite recent disagreements between No.10 and No.11 and Michael Gove has been brought in on housing as it’s seen that we need a heavy hitter in this space to get through systemic changes the government wants to make and Robert Jenrick wasn’t the person to be able to deliver.

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Looking Ahead
​​It’s less about politics (we hope) and more about economics. The US prints retail sales and jobless claim numbers this afternoon, both of which are key momentum indicators for the state of the recovery. Covid had started to turn the tables in the US and the resurgence in major states of late might have dampened what would have otherwise been a bumper summer holiday month for retailers.
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Have a great day.

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