Hello readers, I returned from my first tranche of book leave and would like to wade with you in the swamp. As my partner I am lucky that I have with meOnathan BarthA senior adviser at the Cambridge Institute for Sustainability Leadership, co-founder of ZOE Institute for Future-Fit Economies and a Brussels expert with a particularly interesting view of Europe today.
The United States celebrated its birthday last week, but my thoughts are nowadays in Europe. A few weeks ago I attended a CEO conference in Italy and I was (again) struck by how enthusiastic investors are to diversify from the dollars to euros. That does not mean that they are still doing it, but we are, I think, at a turning point where this can change.
As Currency Research Associates in a recent article stated: “Not only are the dollar exposures of [global] Pension funds and insurance companies large and excessively with 50 percent or more, but aggregated national exposures are large, ”with Taiwan with more than 90 percent of GDP in dollars, followed by Japan at 60 percent and Australia and South Korea with 30 percent.
Diversity would be very logical at the moment, even if Donald Trump would not increase the global trading system and question the independence of the American Federal Reserve, I think, the only risk problem that market participants cannot afford to overlook. Without a free Fed, American markets would correct very quickly.
You can of course make the confading. Last week’s strong American job report strengthened the story of the American exceptionality and dynamics in the midst of political chaos. And yes, shares have risen from the death of the ‘large, beautiful account’, because stock markets always like tax reductions. But the truth is that serious investors are also very concerned about the long -term debts and a shortage for the US, as well as political risk and populism.
For all these reasons, the euro has seen a long -term momentum in relation to the dollar and can see more if Europe can get its act and can really integrate its capital markets. Until now, gold is the world’s second largest reserve active after the dollar. But at the CEO conference I asked 29 world leaders if they would rather invest in Eurobonds (if they exist) instead of the American bond market at the moment, and 18 said yes. For me this indicates that if Europe could really recommend integration integration, repair the capital markets and offer investors the scale they need to diversify, the euro would rise.
President Christine Lagarde from the European Central Bank recently wrote a piece in the FT and called for a “global euro” moment. And President of the European Commission Ursula von der Leyen has made the integration of capital markets an important priority in her second term.
So what are the obstacles to make this happen? Politics as usual, natural, slowness, and the normal technocratic obstacles of bringing together 27 Member States with 27 different legal and regulatory systems. But Jonathan, you have made the case that there is a little deeper and more psychological at work here. So tell us, what should Europe do to make a new and better future on what seems to be a very suitable moment?
Recommended reading
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I thought Ruchir Sharma made some good points about why the American markets should not reflect worldwide reality.
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This very good piece in the Wall Street Journal Looks at how deportations in the American Rustbelt can kill the economic generation there. Migrants (including my own family) are so part of the success of the midwest – this just dives.
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And see my Monday column about why worldwide markets suffer from a “Rashomon effect” in which investors can interpret the same information in very different ways.
Jonathan Barth answers
Thank you, Rana. Europe does indeed feel stuck in the paralysis that is desperate to the old mantras of the market-liberal Playbook-on-unit free trade, restrictive tax policy and a strictly limited approach to the industrial strategy. Neither the Draghi report, nor the American inflation reduction law, nor the return of geopolitics and not even the imminent second China shock have been able to change that.
Commentators have understood the current paralysis by referring to the concept of Antonio Gramsci of an interregnum-which in between, where the old world is formed by economic liberalism, but the new struggle to be born. This applies in particular to Europe today.
The problem with the idea of the interregnum is that it – as descriptive as it can – offers little guidance for finding a way out of paralysis. When I searched for alternatives, I came across the psychology of grief. Interestingly, our personal experiences of mourning can offer orientation for navigating through the interregnum in which we find ourselves. I am currently working on a book that is investigating this in -depth.
In the psychology of grief there is the well-known Kübler-Ross model. It divides mourning into five phases: denial, anger, negotiation, depression and acceptance. I claim that there is a sixth: reinvestment – a stage that we reach once we have released the old and start forming the new.
Europe is still in the middle of the grieving process – in contrast to the US, where I feel a touch of reinvest. That’s because we are a decade behind you in the US. Europe has never experienced a China shock on the same scale. Nor has it undergone a full right -wing shift that is comparable to the person who followed that shock in the US. (I recommend Sander Tordoir and Brad Setser’s recent paper about this about the Second China -Schok.)
As a result, Europe remains stuck in the early stages of sorrow: denial, anger and negotiation. I still meet colleagues who deny that economic liberalism has not realized its promises. Last week at a conference in Berlin I had to defend the industrial policy against the charges of recklessness and idealism.
I still hear people say: “If we get cheap solar panels or EVs from China, isn’t that good for consumers?” Concern about economic security and dependence, the fact that people are not only consumers, but employees who find identity and belong to it – all ideas that feel like common sense in the US – are far from a consensus among the leaders of the European Democratic Center.
In the meantime, what Europe remains is anger. Anger about political elites that have broken the market-liberal promise of eternal material progress. It is an anger that is the right side knows all too well how to operate.
Because they are stuck in denial, Europe’s leaders hesitate to escape anger by stepping into the liberating stage of grief. This would mean acceptance. Acceptance that wealth concentration, financial capital and Ricardian ideas about trade specialization all make democracies susceptible to blackmail. Acceptance that the flexibility markets demand – retraining, moving, reinventing your identity – is in stark contrast to the desire of people for stability and safety.
Instead, the political class of Europe is stuck in half-hearted compromises that do not do justice to today’s order, and instead stick to the ideas of the market-lobal past-in what, in the language of grief, is mentioned negotiation. Yes, the discussions that you mention – the Union of deeper Internal Market Integration – can claim. But the survival of Europe depends on the interplay of capital markets with tax and industrial policy. (For example, see Van Zoe Institute Private Finance Toolbox.) And here we should not fool ourselves. Most of what we see is the symbolic politics rooted in market orthodoxy.
Take the new tax laxity of Germany with its investment package of € 1 TN. From the outside it looks like a paradigm shift. But when we look closer, it focuses on infrastructure and defense, not on industrial renewal. And Germany is a biter. European tax rules are still restrictive for investments. Relaxations of tax expenditure are limited to defense. Consequently, industrial initiatives such as the European Clean Industrial Deal are missing tax support. Even Europe’s new state aid rules from last month do not change much.
My hope? That rising pressure – the threatening China shock and the constant increase in the right – will finally force leaders from both left and right to acknowledge that this cannot continue. And that they will not get stuck in dismissal – a form of the fourth phase of sorrow, depression. Political leaders must remember that Europe has previously successfully navigated paradigm shifts, and that changes are not a threat, but an opportunity to learn and do better.
Then, maybe Europe will finally be ready. Ready to respond to this epocal fracture with a real capital markets, with industrial policy and coordinated monetary and fiscal strategy, and its own geopolitical vision; Ready to withdraw the capital that you are talking about about using the post-neoliberal playbook. But first it has to complete the five phases of mourning for economic liberalism before it can be rebuilt.
