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EU seeks to sever nuclear energy ties with Russia

Brussels will set out plans to end all Russian fossil fuel imports but it delays measures to wean bloc off uranium products

Brussels will this week set out legal measures to put a complete stop to Russian fossil fuel imports into the EU.

But it has delayed plans to wean the bloc off a smaller but far more tricky reliance: Russian nuclear technology.

Since Moscow’s full-scale invasion of Ukraine, EU countries have paid more than €200bn to Russia for fuel. Coal and oil imports have been sanctioned and gas should be phased out by 2027. Nuclear fuel accounted for only about €700mn of the €22bn paid to Russia in 2024, according to the think-tank Bruegel. But officials have warned that the risk to EU energy security is huge if Moscow suddenly cut off supplies.

Tackling Russian nuclear imports is far more complicated.

“Technically speaking the uranium supply chain is very complex”, said Ben McWilliams, affiliate fellow in climate and energy at Bruegel. Therefore a gradual phaseout would be needed, he said.

The EU has 101 nuclear reactors of which 19 are Soviet “VVER” designs. The bloc relies on Russia for about 20-25 per cent of its natural, converted and enriched uranium. Reactors across the EU often buy in Russian spare parts or require maintenance expertise.

The European Commission ideally would like the European nuclear sector to be free of Russian imports by the 2030s, EU officials have said. But in a document published on Friday it warned that €241bn of investment was needed to build out the domestic nuclear supply chain.

EU ministers will discuss nuclear investments at a meeting on Monday.

The move to phase out Russian imports is in line with efforts in other western countries. Canada has banned all Russian uranium imports and the UK has put 35 per cent tariffs on Russian enriched uranium. The US last May passed a law to stop Russian uranium imports from 2028. In April 2023, G7 countries agreed to develop nuclear capacities in order to move away from Russian fuel.

But Russia’s dominance of the sector poses a severe challenge. “[Russian state nuclear company] Rosatom is one of the biggest companies in all sectors of nuclear markets,” said Dmitry Gorchakov, nuclear adviser at the non-governmental organisation Bellona.

The move also coincides with a renaissance in interest in nuclear power in Europe to reach stretching climate targets, adding to pressure on supply chains.

Phaseout plans face strong opposition from Hungary and Slovakia, two of the five member states with VVER reactors, alongside the Czech Republic, Bulgaria and Finland.

In a joint statement, Hungary and Slovakia’s ministers for EU affairs said that the 2030s phaseout ambition would lead to “higher and more volatile prices” and threatened the security of their energy supplies.

Officials in Brussels say that with a slow phaseout, jumps in prices throughout the fuel cycle should be avoided.

The EU has been working since 2022 on diversifying its sources of uranium to countries such as Kazakhstan, Canada and Niger.

But instability in Niger, the world’s seventh-biggest uranium producer, has raised some concerns among EU officials about security of imports and competition from other players.

More troubling is the conversion of mined uranium into a more easily handled gas, a relatively low-margin and dirty business that EU countries have been happy to outsource.

The challenge would be building up an EU conversion industry that could compete with Rosatom’s vastly lower prices, EU officials said. Investments into conversion capacities were “lagging”, Friday’s document said.

Russia also dominates 55 per cent of the global enrichment market, the next step after conversion in which the number of reactive uranium-235 isotopes is increased.

Orano and Urenco, two European companies, make up about 40 per cent of global enrichment capacity, alongside the Russians and Chinese.

Boris Schucht, chief executive of Urenco, said that the company had already started refurbishing existing enrichment centrifuges in the EU “which was originally not intended” to meet increased demand.

He is most concerned about circumvention of any potential trade measures. “We can already see here and there Russia selling volumes to China and China selling volumes that would not otherwise have been available in the rest of the world,” he said.

The parts and knowledge needed to maintain the remaining Soviet reactors, the earliest of which went into use in 1977, is another problem. Building up the skills and confidence among smaller businesses such as welders or pipe manufacturers to produce for the nuclear sector, with its steep safety requirements, is a long process.

The biggest “elephant in the room”, said Bruegel’s McWilliams, were Hungary’s plants in Paks, 100km south of Budapest.

Hungary has long doubled down on Russian nuclear technology, opting in 2014 to build two new Rosatom-designed power blocks, doubling the capacity of its 1980s four-unit nuclear plant at Paks. The two plants together should supply up to three-quarters of the country’s electricity needs.

Despite pressure from the EU and talks with French and US suppliers, Hungary has yet to attempt a switch away from Russian nuclear fuel and parts. EU officials say this is the most sensitive issue to deal with, particularly given Hungary’s typically pro-Russia stance.

The commission has indicated that it would use trade measures to phase out Russian nuclear supplies. These would only require a weighted majority of member states to approve, rather than sanctions which need unanimous approval and risk being vetoed by Hungary and Slovakia.

Sama Bilbao y León, director-general of the World Nuclear Association, said that revenue raised from tariffs should be funnelled back into the industry as an incentive to build up the supply chain.

Frédéric Lelièvre, a senior executive vice-president at Framatome, a subsidiary of state-controlled power utility EDF, told a conference last week that Europe must speed up its domestic industry: “We need to have these facilities and with the IP [intellectual property] in Europe to make sure we can deploy the programmes we want to deploy and not rely on anybody else.”

Asian Development Bank considers lifting funding ban for nuclear power projects

Shift comes as stakeholders Japan and Germany pivot on atomic energy to meet growing electricity demand

The Asian Development Bank is reviewing whether to lift a ban on funding nuclear power projects to help meet a surge in demand for energy across the region.  

The talks between officials at Asia’s largest multilateral lender and government stakeholders reflect growing support for the emissions-free energy source among global policymakers as they search for solutions to meet fast-rising electricity demands and climate commitments.

It follows a decision by the board of the World Bank last week to remove its decades-long prohibition on funding nuclear energy as well as policy shifts on nuclear energy from critical shareholders Japan and Germany.

“As part of a mandatory review of the policy scheduled for this year, we are discussing with our shareholders the possibility of expanding engagement in nuclear energy,” said Priyantha Wijayatunga, senior director for energy at the ADB.

“The energy policy review will consider amendments in response to changes in the external environment,” he told the Financial Times.

The ADB is the largest multilateral development bank in Asia. Last year, it committed $24.3bn in funding to promote development in Asia and the Pacific.

The bank is prohibited from financing nuclear energy projects, although its policies allow it to provide some forms of technical assistance such as energy planning and analysis.

But there is growing appetite among the ADB’s stakeholders for nuclear energy. Japan, the joint-largest shareholder in the bank alongside the US, has dramatically shifted its position on nuclear energy since the development bank finalised its current energy policy in 2021.   

Nuclear energy power provided 30 per cent of Japan’s power before the Fukushima Daiichi nuclear disaster in 2011, which led to the closure of all the nation’s 54 nuclear reactors.

About a quarter of those facilities have since reopened, and Japan’s national energy plan to 2040 adopted in February pledged to “maximise” the use of nuclear power for first time since the disaster. Tokyo also said it would consider the construction of new reactors at existing nuclear power sites.

Japan’s pivot on nuclear energy has been spurred by higher than expected forecasts for electricity demand, thanks to the expansion of power-hungry semiconductor factories and data centres.

Meanwhile, Germany’s new government, led by Chancellor Friedrich Merz, signalled in May that it had dropped the nation’s long-standing opposition to nuclear power.

The US under Donald Trump has also been a vocal advocate of nuclear energy. Last month, the president signed a series of executive orders directing the government to fast-track construction of nuclear reactors, with the aim of quadrupling the country’s atomic energy capacity by 2050.

The orders also included targets for US energy exports and development of civil nuclear projects globally.

Washington has been calling for multilateral lenders to back nuclear projects, which it argues would help western companies compete with state-owned nuclear enterprises in Russia and China that are expanding overseas.

Russia’s Rosatom is building nuclear plants in Turkey, Bangladesh, China, India and Iran, while China National Nuclear Corporation is building reactors in Pakistan.

“The status quo of backroom nuclear deals only helps Russia and China,” said Todd Moss, executive-director at the Energy For Growth Hub, a think-tank that has advocated for western development banks to invest in nuclear energy.

Moss added that development banks could “work with governments to identify the best models for their needs and procure them competitively”.

He said the ADB was in a particularly important position because of its links with countries in south and south-east Asia that relied on coal power.

Rio Tinto’s CEO search marks changing of the guard at big miners

Surprise exit of Rio chief mirrors restructures at top of all four of world’s largest iron ore producers

• Rio Tinto CEO Stausholm steps down, sparking leadership change across major miners.
• No clear successor named; Trott, Pécresse, and Baatar are top contenders.
• Miners shift focus from iron ore to lithium, copper, and potash.
• Boards push for faster M&A to meet investor and project demands.

(Full Article)

At the opening last week of the Western Range iron ore mine in the remote Pilbara region of Australia, Jakob Stausholm gave one of his final speeches as head of the world’s second-largest mining company.

“When I was interviewing for the job as CEO, I said succession planning starts on day one,” the Rio Tinto chief told reporters. Standing behind him in the red dirt was Simon Trott, head of the company’s iron ore division and a frontrunner for the role.

Yet such planning had not been apparent just a few weeks earlier when Rio announced Stausholm’s departure after almost five years at the helm. The news took both investors and senior figures at the Anglo-Australian company by surprise, with the fact that the board did not have a successor lined up raising eyebrows across the industry.

Rio is not the only major mining company looking for a new chief executive. Its search is part of changing of the guard taking place across the senior ranks of the industry, with all four of the world’s biggest iron ore producers either undergoing, or poised for, a shake-up at the top.

This next generation will lead an industry at a crossroads, as demand for iron ore — traditionally their most profitable product — flatlines and miners look to other metals and minerals linked to high-tech industries and the energy transition.

The pace of leadership change “is unprecedented, in terms of that turnover, in such a short period of time”, said Bob Brackett, mining analyst at Bernstein.

Rio Tinto chief executive Jakob Stausholm, left, and head of its ore division Simon Trott © Matt Jelonek/Rio Tinto

As well as Stausholm at Rio, BHP, the world’s largest miner, is expected to seek a new chief executive next year when Mike Henry steps down, while Brazil’s Vale welcomed its new head, Gustavo Pimenta, late last year. Australia’s Fortescue has also shuffled its top leadership after Dino Otranto, head of the company’s metals division, had his role expanded.

The management changes coincide with the imminent first production from Rio’s huge Simandou mine in Guinea, which is expected to keep iron ore prices in check.

Meanwhile, the shift to newer metals and minerals has led to Rio placing more than $10bn in bets on lithium during Stausholm’s tenure via acquisitions, joint ventures and capital expenditures.

BHP is investing heavily in potash, with its Jansen mine in Canada set to start production of the fertiliser next year, as well as placing a huge wager on copper demand with large investments in South Australia and Latin America.

Jérôme Pécresse, head of aluminium at Rio © Simon Dawson/Bloomberg

The race to secure access to copper — the red metal essential for wiring and electricity grids — has been the driving force behind several mega-deal attempts, though the largest efforts have so far been unsuccessful. BHP made a £39bn bid for Anglo American but was rejected, while Glencore and Rio also last year held secret merger talks that did not progress.

Rio’s board and Stausholm failed to see eye-to-eye on the Glencore merger, according to people familiar with their discussions. Speaking at Western Range, Stausholm said there had been “no misalignment” between himself and the board, when asked about reports of tension with Rio chair Dominic Barton, but added that it was “the right time to look for a successor”. 

George Cheveley, portfolio manager at investment group Ninety One, said M&A would remain high on the agenda across the big miners, noting “frustration in boards” about the need to move faster.

“The companies need to get bigger — both from an investors’ demand point of view, and because of the need for bigger projects — and the only way to do that is through consolidation,” Cheveley said. “There’s a feeling that they need someone who can be more assertive with M&A.”

Rio’s chief commercial officer Bold Baatar © F. Carter Smith/Bloomberg

At Rio, the selection process for the next chief executive is well under way, with internal frontrunners including Trott, Jérôme Pécresse, head of aluminium, and chief commercial officer Bold Baatar, according to people close to the company.

Trott is a long-serving Australian who has run Rio’s iron ore operations since 2021 and held the role of chief commercial officer prior to that. He declined to comment at the Western Range opening whether he had applied for the job or whether his prominent role in the ceremony was a dress rehearsal for the position. 

Pécresse, a French citizen who joined Rio only two years ago, is considered to have a strong if short record improving operations at the company’s aluminium business. He was previously chief executive of GE Renewable Energy.

Baatar, a former banker, joined Rio in 2013 and ran its copper business, before becoming chief commercial officer. He is credited with sorting out the ownership of the Oyu Tolgoi copper mine in Mongolia, and getting Simandou on track. 

Australia’s mining minister Madeleine King speaking at the opening of Western Range last week © Matt Jelonek/Rio Tinto

Who takes the helm at Rio is of huge consequence for Australia, where the company employs 23,000 people, almost half the company’s headcount.

Madeleine King, Australia’s mining minister, also highlighted the role that the current leadership had played to repair relations with the indigenous community after the destruction of ancient rock shelters at Juukan Gorge, an event that was the catalyst for the last change at the top at Rio. 

“The global leader of Rio Tinto is an extremely important role and the person that does that . . . is of enormous importance to Western Australia, and therefore Australians,” King told the Financial Times.

Stausholm said he hoped to “pass the baton” on to the new chief when the appointment was made later this year, putting the transition in the context of the ethos of the region’s indigenous community.

“What you learn [from them] is we’re all just a small part of the puzzle,” he said. “Learning from the past and bringing it to the future.”

Was Iran really developing nuclear weapons?

Experts question Israel’s claim Tehran had begun an atomic bomb programme but warn it has become a ‘threshold’ state

Armed with a cartoon-style drawing of a bomb with a lit fuse, Benjamin Netanyahu took to the UN General Assembly podium in 2012 to try to convince the world of the threat posed by Iran’s nuclear programme.

The Israeli prime minister said the Islamic republic was enriching uranium at such a pace that it was on track to be able to produce sufficient fissile material for a nuclear weapon within months. With a marker pen, he drew a red line across the bomb to highlight the stage of the process where Iran had to be stopped, warning that “the future of the world” was at stake.

Fast-forward 13 years, and Netanyahu says Tehran has moved far beyond his red line by establishing a programme to develop nuclear weapons and is using that as his prime pretext for Israel’s devastating assault on Iran.

“In recent months, Iran has taken steps that it has never taken before — steps to weaponise this enriched uranium,” the prime minister said as the first Israeli bombs fell in the early hours of Friday.

But experts say that while Iran has been dramatically increasing its stockpile of uranium enriched to close to weapons-grade, there is no evidence it has decided to build a nuclear bomb.

“Netanyahu is always keen on dangling evidence in front of cameras, whether it’s nuclear secrets or pieces of Iranian drones,” said Ali Vaez, an Iran expert at Crisis Group. “But he offered no such evidence for that claim.”

US intelligence director Tulsi Gabbard told the US Congress in March that America’s intelligence community continued to assess that Iran was not building a nuclear weapon. The International Atomic Energy Agency, which has inspectors in Iran who frequently visited the republic’s two main enrichment facilities at Natanz and Fordow, has also found no evidence to suggest the Islamic regime is developing a weapons programme.

Experts have, however, warned that Iran’s recent advances mean it has become a “threshold state” — a nation with technical expertise and capacity to weaponise its nuclear programme if it chooses.

Days before Israel launched its assault, the IAEA’s board for the first time in two decades passed a resolution saying Iran was in breach of its non-proliferation obligations.

Iran always insists its nuclear programme — initially developed by the last Shah with US assistance — is for peaceful civilian purposes.

But according to US intelligence assessments, Iran had begun initial work on a weapons programme more than two decades ago. Back then it was still in the early stages of uranium enrichment and the programme was halted in 2003, according to the assessments.

A decade later, Iran began talks with the Obama administration that culminated in a landmark 2015 accord signed with the US and other world powers. The agreement, implemented in January 2016, severely limited Iran’s nuclear activity, with a strict IAEA monitoring mechanism, in return for sanctions relief.

Iran was complying with the deal, which limited its uranium enrichment to 3.67 per cent and capped its stockpile of the fissile material at 300kg, with any excess shipped offshore.

But after US President Donald Trump abandoned the deal in 2018 and imposed sanctions on the republic, Tehran responded by increasing its activity, developing and installing thousands of far more advanced centrifuges that it is using to produce highly enriched uranium.

For four years, it has been enriching uranium to 60 per cent — its highest-ever level and a short step away from the 90 per cent required for a nuclear weapon.

In May, an IAEA report said Iran’s stockpile of 60 per cent enriched uranium had swelled to more than 400kg — enough fissile material for about 10 weapons if further enriched to 90 per cent — while its total stockpile of enriched uranium exceeded 8,400kg.

Tehran had for more than a year reached “near-zero breakout time”, giving it the capacity to produce sufficient fissile material required for several nuclear bombs within days, said Kelsey Davenport of the Arms Control Association. But it would still need to develop the technology to build weapons.

“The actual weaponisation process, that’s more challenging to accurately estimate. But it likely would have taken months, possibly up to a year, to convert weapons-grade uranium to fit it with an explosive package, then actually be able to deliver it via a missile,” Davenport said. “So there was no imminent threat of a nuclear bomb.”

The IAEA still has inspectors in the republic, but their access has been restricted after Tehran reduced co-operation with the UN nuclear watchdog. Israel, which is the Middle East’s only nuclear-armed state although it does not admit to its programme, has bombed Natanz. Iran says it also targeted Fordow.

Experts said there was a risk Tehran had secretly set up advanced centrifuges at facilities not monitored by the IAEA where scientists could raise some of its stocks of highly enriched uranium to weapons-grade.

“Iran has produced thousands of advanced centrifuges and the IAEA has no idea where they all are,” said Vaez. “So there is a real possibility that Iran has, as part of its contingency plans, constructed clandestine facilities”.

In April, Ali Shamkhani, an adviser to supreme leader Ayatollah Ali Khamenei, said that if the republic faced continued external threats, it could take “deterrent measures”, including expelling the IAEA.

Shamkhani, who was seriously wounded in Israel’s first wave of strikes on Friday, which killed at least 10 nuclear scientists, added that Tehran could also transfer enriched material “to safe and undisclosed locations”.

Davenport said any secret facility would be more difficult to detect and could enrich material to weapons-grade “very quickly”, adding: “It would only have to remain illicit for weeks.”

Over the past year, as hostilities between Israel and Iran ratcheted up, Iranian officials have also issued ambiguous warnings about the possibility of changing Tehran’s nuclear doctrine.

“In the past year, we’ve seen an erosion of a decades-long taboo in Iran on discussing nuclear weapons in public, likely emboldening nuclear weapons advocates within Iran’s decision-making apparatus,” Gabbard told Congress in March.

Still, the IAEA said in a report last month it had “no credible indications of an ongoing, undeclared structured nuclear programme” and noted “the statements of the highest officials in Iran that the use of nuclear weapons is incompatible with Islamic law”.

Khamenei’s calculations could change, however, if the regime believes it now faces an existential threat and needs nuclear weapons to restore deterrence. And Israel’s strikes mean IAEA inspectors are unable to visit Natanz and Fordow, leaving the world blind to Iran’s activities for as long as Israeli bombing continues.

“The attacks will drive further discussion about the security value of nuclear weapons,” said Davenport. “My more immediate concern is that, in the absence of regular inspections, given the chaos that’s been caused in the strikes, the damage at the facilities, did Iran move any of its 60 per cent enriched uranium?”

Vaez believed the regime would still be cautious, saying Iran was “in a weak spot and doesn’t want to make a bad situation worse by bringing the US in”.

But he added that once the dust settled, Iran could feel the need to restore “leverage” ahead of any future talks with the US, including possibly withdrawing from the international nuclear non-proliferation treaty.

“Only then I think we would hear Iran declaring its intention to change its nuclear doctrine. Israel has diminished Iran’s nuclear leverage, they would have to regain some,” Vaez said. “But we’re not there yet.”

Davenport said one thing Israel could not do was “bomb away the knowledge”.

“So Iran can rebuild and they can rebuild more quickly now,” she said.

With antitrust concerns assuaged, bank shareholders, not protectionist bureaucrats, should decide takeover battle

At a Barcelona economics conference last month, headlined “Europe: wake-up call?”, Spanish Prime Minister Pedro Sánchez took to the stage and urged the continent to “wake up once and for all . . . take control of its destiny, and move from words to action”.

The EU — galvanised by US President Donald Trump’s aggressive tariff policies — is awash with talk of stimulating economies and boosting competitiveness. In particular, last year’s influential report on European competitiveness by former European Central Bank president Mario Draghi has been seized on by European Commission president Ursula von der Leyen. A commission consultation on merger rules is now under way with a view to encouraging companies to grow through acquisition and better challenge global rivals, particularly from the US.

Both the EU policy push and Sánchez’s pronouncements in Barcelona look like dream news for those pursuing mergers and acquisitions. In particular, it should be a helpful boost for the likes of UniCredit as it pursues acquisitions in Italy and Germany, and BBVA as it goes after domestic Spanish rival Sabadell.

Yet the opposite is true. Despite the fine rhetoric at both an EU and member state level, there has been stiff practical opposition to bank deals (with some small exceptions such as last week’s purchase of Portugal’s Novo Banco by France’s BPCE). Nowhere is that more true than in Spain. Only a few weeks after that Barcelona speech, Sánchez’s government placed another obstacle in the way of the proposed BBVA-Sabadell deal, referring it to a review by cabinet ministers.

Any merger must go through antitrust reviews — which BBVA-Sabadell passed, with remedies — as well as secure EU-level support, which it has. So why has the transaction so inflamed Sánchez and his government?

The original issue was the target’s resistance. Sabadell was not open to an agreed deal and when news of an approach leaked last April and BBVA decided to go hostile, the timing could not have been worse. It came just a few days before regional elections in Catalonia — Sabadell’s heartland. At the same time, mergers can be problematic for Sanchez’s socialist administration, which has made protecting jobs a top priority. Waiting for a more business-friendly government might be in vain: a general election is not due until the summer of 2027.

Tiggerish BBVA chair Carlos Torres used to describe his bid for Sabadell as “unstoppable”. Today that seems like a fanciful view. The process so far has been painful. The bank was particularly cross about what it saw as the politicisation of the antitrust process of Spain’s National Commission for Markets and Competition. BBVA eventually overcame antitrust concerns in April, after pledging remedies including protection for vulnerable customers and the maintenance of lending volumes to small to medium-sized enterprises and branch numbers.

Yet the government then launched an unprecedented public consultation as well as the cabinet review. Alarmed by the level of interference, the European Commission last month warned Spain that it did not have the legal authority to block the takeover.

Everyone knows that if Sánchez digs in his heels, he can kill the deal all the same. Further delaying tactics could trigger EU legal action, but that would be academic: the years it would take to bring infringement proceedings would render any ongoing takeover offer unworkable.

So what is the way forward? The example of another Spanish company may be instructive. The campaign by Telefónica to pursue its own agenda of mergers, in Spain and across Europe, seems to have garnered the support of the Spanish government. The quid pro quo is that newly installed chief Marc Murtra is backing the kind of diversified technology investment that the government has advocated. The snag for Torres? Murtra, a rare Spanish business figure and a friend of Sánchez’s administration, was put in position by the government after it took a 10 per cent stake in the company and forced out his predecessor.

If the wily BBVA boss can find a way to overcome Sánchez’s antipathy with investment pledges or other sweeteners — while avoiding more invasive interference — he might finally be able to put his offer to the shareholders of Sabadell. Torres is probably right that the economic interests of Spain, and Europe more broadly, would be advanced by the deal and the signal it sends. But either way, with antitrust concerns assuaged, it should now be the shareholders and not protectionist bureaucrats who decide.

The trade-off confronting investors: The U.S.’s biggest stocks are more innovative and profitable but also far more expensive

It’s easy to think of Europe as the investment that time forgot. Even after this year’s strong performance, European investments have lagged far behind the U.S. for the past decade and more.

But it would be wrong to regard Europe as having been a disaster forever: Look backward, and it matched American stock returns for decades before the euro crisis and the rise of Big Tech in the U.S.

Investors might question the current mania for investing outside the U.S., when stocks in the rest of the world gained 14% this year against the U.S.’s 2% (about half of the rest of the world’s gain was due to the plunging greenback—all figures in dollar terms).

And Israel’s strikes on Iran, with the potential economic hit to Europe from higher oil prices and disrupted shipping lanes, highlight the geopolitical risks in investing abroad.

But too many people focus on the dismal returns since 2010, when the Greek crisis began, and forget that once Europe was a viable investment alternative. The scary stat: Since 2010 the S&P 500 is up more than 500%. European stocks are up less than 150%. The reminder: In the previous 15 years, from 1995, the S&P made only 130% while Europe gained 220%.

The important question is what changed in the past decade and a half to make investors believe in U.S. exceptionalism—and might it change back?

The simplest answer is the rise of the so-called Magnificent Seven, part of a dominance of new technology by the U.S. that swept the world. The original seven-largest U.S. stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla (the carmaker has since been overtaken by chip maker Broadcom)—spent heavily on research and development and now dominate several highly profitable emerging industries. That propelled them to end last year collectively worth more than all listed European companies, as measured by LSEG Datastream.

R&D is a strong predictor of future earnings and last year, for the first time, today’s Mag7 companies (including Broadcom, rather than Tesla) spent more on R&D than all European listed companies combined, according to Michel Lerner, head of UBS HOLT research. The result is that U.S. corporate R&D spending soared from 1.3 times as much as in Europe in 2007 to three times as much last year.

“It’s somewhat sobering for Europe, since there is a lot of evidence that R&D spend typically creates barriers to entry that support higher [return on investment] and growth for longer,” he said.

Europe’s failure to keep up with emerging tech shows up in big U.S. companies having far higher profit margins than big European ones. Among smaller companies, though, profit margins are about the same.

Strip out the skew toward the biggest by putting equal weight on each S&P stock—rather than putting more weight on the more valuable, as the basic index does—and U.S. and European returns were roughly the same from the end of 2021 until the November election. It isn’t so much U.S. exceptionalism, as Mag7 exceptionalism.

Yet, the difference isn’t all about Big Tech. Europe’s economy has been sluggish ever since its currency crisis of the early 2010s, while inflexible labor law combined in some cases with political pressure meant companies were slow to cut back on capacity. The result is less intense use of factories and other assets, meaning an even bigger advantage for U.S. return on investment than the gap in margins implies.

These differences were compounded from 2017 onward by a sharp rise in U.S. valuations that wasn’t matched in Europe. Again, this was about the biggest companies; U.S. smaller companies trade at a premium to Europe, but about the same as they always have.

So, back to what’s changed. On R&D the signs are that European governments have realized they have an issue, but have yet to do anything about it. At least they accept they have a problem, however, both with R&D and with the stultifying effects of too much regulation.

On the economy, Europe has decided for the first time since the euro crisis that it needs to let rip with government spending. Germany is leading the way, plowing money into defense and infrastructure, which ought to reflate its economy—and help lift corporate capacity utilization and profits. The European Central Bank has been cutting rates, too, though higher energy costs after Israel’s strike on Iran might give it pause.

“There’s a rotation going on,” says Jim Caron, chief investment officer of the portfolio solutions group at Morgan Stanley Investment Management. “Europe’s got monetary policy stimulus, and it’s got fiscal policy stimulus. It has a currency tailwind.”

The trade-off confronting investors: The U.S.’s biggest stocks are more innovative and profitable but also far more expensive, while Europe’s are much less interesting but are cheap and have stimulus, plus an appeal to investors looking to diversify away from their highly concentrated U.S. holdings.

Europe just has to close the performance gap with the U.S. a little to make it an interesting investment—again.

How Stablecoins Can Be Destabilizing

Banks will retain lots of deposits, but they might become bigger and less reliable

Stablecoins’ going mainstream wouldn’t take all of banks’ deposits away. Just some of the better ones.

The Senate looks set to soon pass the so-called Genius Act, which will set guidelines for issuers of stablecoins—digital tokens that are fully backed by fiat currencies such as dollars. One big debate over the wisdom of giving stablecoins a regulatory framework centers around how they would affect the current banking system if they were to hugely expand in size.

Strictly speaking, stablecoins don’t take funds out of the banking system. One way or another, these dollars will usually end up back in banks. What banks wind up with, though, could be something very different: the kinds of big, uninsured deposits that make some people nervous.

When a U.S.-dollar stablecoin is created, the issuer receives U.S. dollars that they put in reserve. Under proposed guidelines of versions of the Genius Act, stablecoin issuers can hold reserves in bank accounts. They can also buy things such as U.S. Treasurys, which moves cash to the accounts of the sellers of those assets. They can even essentially lend cash to banks, as part of so-called repurchase agreement transactions, as money-market funds often do.

“Stablecoins could be thought of as being similar to a digital version of money-market funds,” strategists at JPMorgan Chase JPM -1.23%decrease; red down pointing triangle wrote in a recent note. With those kinds of funds, “bank deposits are not ‘destroyed’ by such a shift, but are simply transferred to other economic agents,” the strategists wrote, noting that such a shift doesn’t reduce the availability of credit.

Still, the ways in which deposits and funding could be transformed would be crucial.

For one, if an individual takes money out of a sub-$250,000 account that is fully covered by government deposit insurance, and moves it to a stablecoin issuer, that money might end up in a much higher-balance account that isn’t fully insured. Those deposits can be costlier for banks and more prone to move quickly.

“Collecting deposits from stablecoin issuers transform[s] retail deposits that can serve as a stable source of funding for banks into volatile deposits that cannot,” according to a recent analysis paper written by researchers at the European Central Bank.

Big uninsured corporate deposits were one concern during the 2023 regional banking crisis. Among Silicon Valley Bank’s depositors at the time was USDC-issuer Circle Internet Group. The company, which went public last week, said in its offering prospectus that in March 2023, it initiated transfers of “more than $3 billion of deposits” from SVB, but that those transfers didn’t settle before regulators took control of SVB. USDC traded below $1 on some exchanges at the time. The dislocation was resolved soon after the government announced that all of SVB’s deposits would be guaranteed, the company said.

Bigger deposits would likely accumulate in the largest banks, which already are required to keep a very large portion of their assets highly liquid, and might face less risk if funds move quickly. Circle said in its prospectus that it has invested in and refined its reserve management structures, including “holding the significant majority” of cash reserves at global systemically important banks. This is a category that includes the likes of Bank of America BAC -1.19%decrease; red down pointing triangle, Citigroup C -2.39%decrease; red down pointing triangle, JPMorgan and Wells Fargo WFC -2.23%decrease; red down pointing triangle.

And that is even before considering that it might be large banks that themselves ultimately issue stablecoins. The Wall Street Journal has previously reported early discussions among big banks about whether to jointly issue a stablecoin themselves.

Rewards paid to holders of stablecoins, and the emerging market for “tokenized” versions of things such as Treasury bills, also raise the likelihood that people will have more options for earning yield. Banks might generally have to raise their deposit rates to compete.

Dealing with all of this is likely to be manageable for the biggest banks. Smaller banks could face a bigger disruption if stablecoins truly catch on for people’s day-to-day cash and savings.

The Club World Cup opened in Florida on Saturday night with a surprisingly packed stadium and with Lionel Messi as its star attraction. The only thing missing was goals.

The idea of inventing a brand new global soccer tournament and putting it in America was always going to be audacious.

But in creating the Club World Cup, FIFA flexed every muscle. It rounded up 32 teams, 12 venues, and over $1 billion in prize money Against all odds, it even managed to draw 61,000 fans to its opening match on Saturday night—an unlikely matchup between a plodding Inter Miami side and the Egyptian club Al Ahly.

The one thing that FIFA couldn’t engineer was goals.

As the tournament kicked off with the first of 63 matches, the grand spectacle conceived by FIFA President Gianni Infantino had to settle for a 0-0 draw. Not even Miami’s Lionel Messi, one of the Club World Cup’s star attractions, could break the tie.

In fact, Messi was lucky not to lose. Though he forced a couple of spectacular saves from the goalkeeper, he was in the rare position of being an underdog. Al Ahly, one of the most decorated clubs in world soccer, had the better chances to win and even had a first half penalty saved.

“I’m disappointed with the result—we could have taken all three points,” Al Ahly forward Wessam Abou Ali said. “We respect Inter Miami and their big-name players, but we could have finished the game in the first half by scoring three or four goals.”

The more significant takeaway from the evening was the surprising show of force from the Al Ahly fans. FIFA had orchestrated things so that Inter Miami could play the opener in its home city in an effort to drive up attendance. But it was the Egyptian fans who took over Hard Rock Stadium, 6,500 miles from the Nile, with red Al Ahly shirts far outnumbering Miami’s pink jerseys.

“It’s like we were playing in Cairo,” Al Ahly manager Jose Riveiro said.

The Egyptians players won’t be the only ones to feel a taste of home away from home during this tournament. While plenty of venues have seen sluggish ticket sales, it’s already clear that a handful of clubs will enjoy robust traveling support.

In Miami, fans of Buenos Aires-based Boca Juniors were ready to flood Hard Rock Stadium for their Monday match against Portugal’s Benfica. And in New York, a merry contingent of Brazilian Palmeiras fans signaled their arrival by pouring into Times Square on Saturday ahead of their opener against Porto. FIFA is hoping for plenty more to make the trip as the tournament progresses. Beyond the U.S., the biggest markets for ticket sales have been Argentina, Brazil, and Mexico, the organization said. But not even FIFA—or perhaps Al Ahly—could have anticipated so many Egyptian supporters suddenly materializing in South Florida.

“To be in the States and have it like you were playing at home,” Riveiro said, “is something that can probably only happen here.”

Prime minister backtracks on need to review scale of sexual exploitation after months of pressure

UK Prime Minister Sir Keir Starmer will authorise a full statutory inquiry into the scale and extent of child sexual exploitation, after months of pressure on him to do so.

Starmer on Saturday said he had accepted the need for a national inquiry into grooming gangs on the recommendation of Baroness Louise Casey, whose near 200-page report into the scandal will be published on Monday.

Casey has been carrying out an audit of the scale and nature of gang-based exploitation across the country, the subject of fierce political controversy, after scandals first emerged in the north of England in 2013.

The report is expected to deliver searing criticism of public authorities, which have been accused of failing to act decisively against “grooming gangs” of men of predominantly Pakistani origin over fears of racism.

The Conservatives and Reform UK have demanded a national inquiry for months and Yvette Cooper, home secretary, will be accused by opponents of dragging her feet when she makes a statement to MPs on Monday.

Starmer, speaking en route to a G7 summit in Alberta, Canada, said of Casey’s review: “Her position when she started the audit was that there was not a real need for a national inquiry.

“She has looked at the material and she has come to the view that there should be a national inquiry on the basis of what she has seen.”

The scandals — in which gangs of men groomed and raped girls who were largely white — have already led to several inquiries.

The issue re-emerged earlier this year after billionaire Elon Musk posted on his social media platform X about the issue and called for a national inquiry, a demand that was echoed by the Tories and Reform.

In January, Downing Street said that victims “do not want to see a national inquiry, they want action taken to deliver justice”.

But on Saturday Starmer said: “I have never said we should not look again at any issue. I have wanted to be assured that on the question of any inquiry . . . that’s why I asked Louise Casey, whom I hugely respect, to do an audit.”

The prime minister added that he had read “every word” of Casey’s report and that he was “going to accept her recommendation”.

“That is the right thing to do on the basis of what she has put in her audit,” Starmer said. “I asked her to do that job to double-check on this. She has done that job for me and having read her report — I respect her in any event — I shall now implement her recommendations.”

Starmer said the report would be “statutory under the Inquiries Act” but would take some time to set up “in an orderly way”.

Kemi Badenoch, Conservative party leader, said: “Keir Starmer doesn’t know what he thinks unless an official report has told him so. Just like he dismissed concerns about the winter fuel payment and then had to U-turn, just like he needed the Supreme Court to tell him what a woman is, he had to be led by the nose to make this correct decision here.”

Badenoch said the inquiry should be done “properly and quickly”.

Earlier this year Cooper announced government-backed local inquiries into grooming gangs, offering £5mn in funding for up to five locally led probes into historic cases, including one in Oldham.

They are expected to follow the model of a judge-led inquiry that took place into grooming gangs in Telford.