The Eagle and the Dragon

Geopolitics has always been an important factor in explaining the economy, but at the current historical moment, the way in which major powers wield political power over the economic landscape represents a turning point. There has been extensive debate to find compelling economic reasons behind the US intervention in Venezuela. However, some analysts are beginning to suspect that a particular vision of the exercise of power, and not solely or even primarily economics, is the prevailing reason behind many of the Trump administration's decisions. Venezuelan crude is relatively expensive to extract, and it is unclear whether major oil companies consider it profitable, under current conditions, to invest the enormous sums required to substantially increase current production levels. The US administration may value control over Venezuelan crude as an opportunity to extend its influence over the market and manage future inflationary pressures, but this factor does not appear, for now, to be decisive. Despite the rebound in oil prices following the situation in Iran, the underlying trend is downward.

One of the surprises of 2025 has been the relatively contained impact of the tariff shock on the global economy. Both American consumers and importing companies would have absorbed much of this shock, although the pass-through of costs to prices will be gradual over time and will continue to be felt throughout 2026. On the other hand, the boost from investments associated with the deployment of artificial intelligence, and the stockpiling of inventories by Americans in anticipation of future needs, would have offset the negative effects on activity of increased producer costs. However, beneath these cyclical fluctuations, the symptoms of a structural change are visible: the depreciation of the dollar since the new administration took office, along with public debt that refuses to decrease and 10-year interest rates pushing upward, point to fragility.

The dollar's privileged position as the world's reserve currency is the keystone underpinning the exceptional borrowing capacity of the American economy in foreign markets. If investor confidence in the dollar continues to weaken, despite the recent recovery, the continuation of this historical exceptionalism would no longer be guaranteed. With the economy operating at virtually full capacity, expectations of further tax cuts, increased defense spending, and the immigrant workforce under pressure, the outlook for US prices could rise. The Federal Reserve's monetary policy in this scenario remains uncertain, especially with a new governor set to take office in a few months. Markets have reacted positively to the new figure, but interference from the executive branch in the central bank would not be surprising. In this context, the temptation to use fiscal policy to stimulate the economy before the midterm elections could intensify the financial markets' distrust. With inflation expectations not yet firmly anchored, the market reaction could put further upward pressure on long-term interest rates—which have the greatest impact on economic activity. If we also consider the magnitude of accumulated public debt maturities and a stock market at record highs, always sensitive to interest rate movements, the latent risks in the American economy could transform into threats if the investment in AI does not soon yield the expected results.

On the other side of the world, China continues to sell off part of its enormous reserve of dollar-denominated assets in a controlled manner, while the price of gold has been surpassing all-time highs—and it remains to be seen whether the recent corrections signal a firm trend reversal. There has been speculation that one of the main reasons behind the American intervention in Venezuela was to protect the market from so-called "petrodollars," as the sale of Venezuelan crude oil in China without using the US dollar would be eroding its value. An additional explanation would be the symbolic value that the current American president gives to oil, along with the dollar, as an instrument of geostrategic power – perfectly encapsulated in one of its most characteristic expressions: drill, baby, drill–History shows us that great civilizations have been built around a dominant energy source. Coal in the case of lion British, oil in the the eagle American, and perhaps renewables in the ascending dragon Chinese.

Europe has no single mythical animal to represent it, and its commitment to renewables is losing steam in the face of the increasingly menacing dance of the eagle and the dragon, played out in a world increasingly driven by the force of power and less and less by the force of reason. It has been said that European research is comparatively more advanced in the field of nuclear fusion, which is destined to be a clean energy source that will surpass existing ones when it materializes. However, if Europe does not establish itself as an effective political power before this energy source becomes a reality—a distant one for now—the combined shadow of the eagle and the dragon could eclipse it. We hope that we don't have to wait until this shadow falls upon Greenland or Taiwan for Europeans to awaken to the new reality.