Active is: Seeking a way ahead

A manifesto for Europe

A manifesto for the new European parliament

Summary

Departing EU President Jean-Claude Juncker leaves his successor with quite a to-do list. What should be the priorities for the incoming administration?

Key takeaways

  • There has been limited progress made in resolving Europe’s old challenges, and new ones have emerged, including how to respond competitively to large US corporate disruptors
  • Nevertheless, Europe has tremendous inherent strengths, notably across the energy, industrial and consumer services sectors
  • The EU should avoid the US model of “move fast and break things” by reinvigorating its scientific and engineering skills to “move slow and make things”
  • Europe can offer an alternative model, which values individual freedom, tolerance, open trade and political and social freedom

European Union (EU) President Jean-Claude Juncker leaves his post in October, after five years in the role. At the start of his term, we wrote about Mr Juncker’s key priorities in his first 100 days, encouraging him to be bold on political, economic and social issues. Five years later… well, not much has been done to address the malaises that afflict the world’s largest trading bloc. There has been little boldness over the past half-decade.

Much, of course, has changed in those five years, not least Brexit and the rise of right-wing populist movements and governments, which threaten the cohesiveness of the EU and reflects new fundamental fault lines that have been opening up in the past decade.

Box 1 outlines the challenges highlighted five years ago and how each area has developed during Mr Juncker’s term. While the EU President’s scorecard shows little success or progress, it is worth re-addressing the challenges that Europe now faces and offering another “Manifesto for Europe” to the incoming president.

Box 1: Challenges facing the incoming EU President

in 2014 in 2019
PoliticalPOLITICAL
EU austerity against Italy and its banks Unchanged, Italy still weak and struggling
Tension with the UK to avoid Brexit Brexit - and a no-deal - may happen this year
Rising tensions with the US over spying Russia, US tech firm regulation and taxation, and threats to NATO loom
EconomicECONOMIC
EU growth dependent on global demand EU slowing as China stalls and trade wars grow
Brussel’s bureaucracy to deliver a new EU vision Muddling through still seems likely
SocialSOCIAL
Youth unemployment nearing a social crisis A lost generation is now emerging
Ageing and immigration causing social concerns Rising immigration contributing to political fragmentation
FinancialFINANCIAL
ECB policy has weakened the euro Further weakness may anger the US
ECB QE has not solved the banking doom loop Banks remain a weak link for investors
Zero interest rates have not boosted activity In Germany, negative rates have actually seen an increase in saving, not spending


The evolution over the past few years has produced many new challenges:

Europe’s divided approach to investment and taxation has seen both internal competition and a failure to compete collectively with the US and China. Strong cultural and regional differences have meant Europe has been unable to respond competitively to large US corporate disruptors, except through regulation such as GDPR.

Europe has also struggled to make the most of its innovation. A lack of entrepreneurial flair and risk-taking venture capital has seen young European talent relocate to the US, where start-up failures are more tolerated and risk capital is easier to access. Regulation in Europe has often stymied home-grown innovation and invention, even though many European corporates are in fact global leaders in their industries.

Established corporates have been hindered as structural and industry reforms have been repressed, such that the EU has not benefited from the economies of scale of its US and Chinese competitors.

Capital markets are fragmented and unsympathetically regulated, raising capital costs and lessening potential returns. Further, political and policy uncertainty undermines corporate and investor confidence, as market-based solutions are often ignored.

So, as Europe faces a world that may soon encompass Brexit and widening trade tension between the EU, the US and China – as well as growing political strains centred around Iran, Russia, Ukraine, NATO, Nordstream II and climate change, the next EU President faces an even more complex yet pressing array of challenges.

Today, five years on from our first, we offer a second “Manifesto for Europe”, which may help the new president prioritise and focus on the key challenges over the next five years.

  1. Europe has tremendous inherent strengths, particularly across the energy, industrial and consumer service sectors, which can offer global solutions to pollution, energy efficiency and climate change, creating an Industriewende 4.0 (“industrial shift”) and a second Wirtschaftswunder (“economic miracle”). This will dovetail well with heightened environmental awareness, as indicated by the increased Green party vote in the recent EU elections.
  2. Europe should continue to avoid the US model of “move fast and break things”, instead reinvigorating its scientific and engineering skills to “move slow and make things”. It could increase and incentivise more research and development into sustainable real-world and future-world solutions, such as hydrogen power, nuclear fusion and low-carbon and biodegradable plastics. The EU’s Horizon 2020 programme is already ploughing more than €24bn into research, technology, infrastructure, and higher education.
  3. Europe must return to the importance of education and youth engagement so that the generation most impacted by the recent crisis is not lost from making an economic contribution in the future. This should also ensure that academic mobility and access to opportunity increase.
  4. Taken as a whole, Europe has strong sovereign balance sheets and good savings ratios, which can be put to better use addressing the challenges of ageing demographics, the affordability of welfare and healthcare, and tensions around immigration into the EU from Africa and the Middle East, which is likely to continue to grow as desertification around the Sahara continues.
  5. Europe needs its leaders to see it as a single market – which recent M&A (mergers & aquisitions) refusals suggest is not currently the case – as its larger, more global competitors will offer greater scale and resources in the future. In addition, Europe should be encouraging the greater efficiency of its broad corporate environment, as it will deliver a payback of more investment, better services and lower prices to consumers, as well as a more competitive and productive economy.
  6. Europe can continue to take the lead in creating and regulating a digital single market, which will be increasingly demanded by its millennials (those born between 1981 –1986) and centennials (born between 1997 – 2017). This should ease the pressure to develop rivals to the US’s tech giants, but prioritising the creation of wealth and economic benefit to European standards, unlike the profiteering US equivalents.
  7. Europe has the size and opportunity to stand against the growing friction between the US and China by offering a third way to other nations who value individual freedom, tolerance, open trade and political and social freedom, underpinned by a fair social contract to protect the weak and ill.

Such a manifesto has the potential to align and unite those many Europeans concerned by rising political tensions. It could create the momentum needed to conclude the last essential steps on the way to the “United States of Europe”. The question is: will the new president be bold enough to pursue that opportunity?




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Will Fed easing support risk assets?

Will Fed easing support risk assets?

Summary

An insurance easing cycle looks likely in the second half of 2019. This has historically meant positive returns for equities, but we still favour a defensive position across risk markets.

Key takeaways

  • The Fed is likely to commence an easing cycle in the second half of 2019; the FOMC has indicated that its next move will be a rate cut
  • US growth is decelerating, but we do not see an imminent recession over the next six months, so Fed easing would be what an “insurance” cycle
  • Historically, equities and fixed income have both performed well during insurance cycles
  • Despite insurance easing cycles historically resulting in positive returns, we still favour defensive positioning across risk markets
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