In my last note, we walked through how the coming Fed regime change puts Europe under the gun.
We talked about how the screws turning on the ECB could be the catalyst for political change in Europe — and realignment with the United States, away from China, away from the “third pole” posturing.
Just days later, the European leadership is showing desperation.
France’s Macron flew to Beijing, spent six hours with Xi, and on the flight home told reporters that Europe should break from the United States, stop depending on the dollar, and become its own “third superpower.”
Marco Rubio responded by publicly stating that if Europe refuses to align with the U.S. on Taiwan, the U.S. will withdraw from Ukraine.
And then today, German Chancellor Merz went on camera and said the U.S. campaign in Iran is “ill-considered,” that the Americans have “no convincing strategy,” and that “an entire nation [the U.S.] is being humiliated.” This is the same guy who, early last week, said “every man knows we cannot defend ourselves by our own strength.”
What’s going on?
To answer that, let’s revisit an excerpt from a year ago (my May 7th, 2025 note) …
Pro Perspectives – May 7, 2025
“… restoring U.S. influence with Europe hasn’t worked. The Trump efforts to end the Ukraine-Russia war have been met with pushback from Europe.
They’ve responded with the 800 billion euro plan to ‘re-arm’ Europe, in what seems to be an effort to support a continuation of the war.
The trillion-dollar question is, who will fund it?
Well, who’s looking for a new market to direct its excess manufacturing capacity toward, while also supplying the cheap credit to buy their stuff?
China.
… with the U.S. looking to end the multi-decade wealth transfer to China, China may have a ‘plan B’ in Europe.
Would the European Commission take the invitation to partake in China’s capacity dumping, credit fueling, industry gutting economic partnership?
We may find out in the coming months.”
With a liquidity crisis coming down the pike in Europe (accelerated by the energy shock), this time without the backstop of the world’s most powerful central bank (the Fed), the Brussels political class has only two paths.
Path 1) They can align with Washington, which would mean admitting that their policies — open borders, climate agenda, deindustrialization, energy dependence, dismantled defense capacity — destroyed Europe’s competitiveness.
If they do that, they relinquish their power grip, and likely end their political careers.
Path 2) They accept Chinese liquidity and solvency support in exchange for becoming the next debtor consumer market for Beijing.
Is the Macron trip and Merz rhetoric a clue on path 2 (at least trying to develop some negotiating leverage with Trump)?
Trump’s strategy has seemingly been to squeeze them economically and financially (by the vulnerabilities of their own design) until the costs of the current leadership become unbearable, and the people of Europe deliver their own change of leadership.
That’s the political backdrop heading into two related central bank meetings this week.
The Fed meets Wednesday. This will be Jerome Powell’s last meeting as Fed Chair.
In the post-FOMC meeting press conference, will any of the esteemed financial media think to ask him about the nearly $200 billion of balance sheet expansion the Fed has done since December? Moreover, will anyone ask about Powell’s December declaration that ongoing $20-$25 billion a month would be needed indefinitely?
This, as the incoming Fed Chair (Warsh) just said last week that the Fed needs a smaller balance sheet.
Then Thursday, we get the ECB.
Since the Iran strikes eight weeks ago, Europe’s rate picture has flipped. On Feb 27th, the market was pricing in a small chance of a rate cut, now it’s pricing in two rate hikes by year end.
But the ECB can’t resolve an energy-shock-driven inflation with rate hikes.
More likely, the energy shock comes with demand destruction, a slower economy, and harder times for the fiscally fragile countries in Europe. And with that, the ECB’s program that’s designed to defend the solvency of the fiscally fragile countries in Europe, will most likely be tested in the coming months.
