mast image

Special Report

ESG: The metrics jigsaw

Sections

Briefing: Deep tensions threaten EU vision

Related Categories

  • Brexit is a distraction from the other challenges facing Europe
  • France is suffering from high levels of public debt and a heavy tax burden

This is not a commentary on the UK within or without Europe. Brexit has been a compelling distraction but it is one macroeconomic strand in a complex world. The overwhelming coverage has also moved attention away from key internal tensions within the European project. 

Sometime later this year, the UK will either leave, remain or prevaricate yet again. Which and what variation of those will occur is a matter of guesswork – the natural result of a set of equally improbable outcomes that yet, somehow, all add up to one. 

For Europe, however, it is a frustrating distraction that it can ill afford. Notwithstanding the potential economic impact that a no-deal or poor deal may have, there are other more pressing challenges to address closer to home. 

Within the EU, there is an acute knowledge of the fraying fabric of integration over recent years. The euphoria of German reunification and the expansion of Europe eastwards two decades ago has faded. 

Instead, supporters of the European project are on the defensive and fighting to reassert a once-popular mandate. They feel embattled by the surge in authoritarian populism, the rise of euro-scepticism as well as the open challenge from the likes of Italy and Hungary as once fringe parties become the mainstream.

It is this that has partly driven European obstinance (some may even say brilliance) in Brexit negotiations and the palpably evident frustration over the sclerotic path to getting any resolution to the British impasse. 

It is a distraction from the other worries that are waiting in the wings. 

The European Central Bank (ECB) has thrown plenty of money at Europe’s fragile financial architecture to shore up its foundations, with the result that the sovereign and the banking system are inextricably intertwined. Policymakers have adopted a form of cognitive dissonance, finding no paradox today between their beliefs of weak enfeebled bad economies, and perfectly solvent good banks that happen to own large amounts of the same sovereign’s debt. But as growth stutters, they find themselves fretting about the economic stability of Europe. 

president emmanuel macron and chancellor angela merkel

Handing over? President Emmanuel Macron and Chancellor Angela Merkel

Alongside, there is the visible impact of the past decade on the social stability of Europe and the rise of populism. There was a brief moment when commentators and policymakers thought ‘peak populism’ had arrived, particularly when Emmanuel Macron won the French presidency against Marine Le Pen on a staunchly pro-European platform. But he has lost the lustre of his earlier popularity, and these days is most likely to be found encircled by regular protests, most notably the gilets jaunes (the yellow vest movement). 

This is seen as yet another sign of the frustration and disenfranchisement sweeping Europe. But for supporters of the EU, it is also something transient, given Macron’s earlier resonance. 

Macron has risen to the fore of this movement, adopting an imperious presidential style and casting himself as a new Charles de Gaulle, the great French statesman, pushing for the UK to be exited speedily and for Europe to move on rapidly past. As Angela Merkel, the German chancellor, has retreated from the limelight following her own domestic travails and impending exit, Macron has seized the moment to push for a vision of a renewed Europe, advocating greater integration and financial reforms. His grand plan may have found few supporters amongst fellow European nations yet, but he has certainly commandeered the stage. 

One may even term him a modern-day Charlemagne pretender, after the great pan-European leader of the early middle ages, seeking to carve out a new empire with France at its helm. His calls for a European army and his ringmastering of the recent G7 summit of world leaders in August speak to a grander seemingly confident vision for the continent. 

But behind this emperor in waiting, the sense of urgency is rooted in the knowledge that France is also running out of monetary runway.

Today, France has a government debt to GDP ratio of over 98%, placing it fourth amongst the G20 in terms of indebtedness. Above it sit Japan, Italy and the US. The first and the third are supported by deep internal markets, while the US also benefits from having the global reserve currency. Italy, however, is a different problem, with its debt being the pragmatic leveraging of an implicit Franco-German sovereign guarantee by a nation that has seen little in the way of robust economic growth.  

The French problem is that outside of the European yoke, French banks hold Italian bonds and loans to the tune of some 12% of GDP, making them and the French state highly sensitised to Italian volatility and fortunes. 

Alongside, France’s tax revenues are 46% of GDP – at the top end of what countries have been able to collect historically, and well above the OECD average of 34%. Indeed, it has overtaken Denmark to be the leading nation globally in this regard. 

The country’s ability to raise taxes may be summed up as effectively zero. In this context, the gilet jaunes protests are completely understandable. Indeed, France had the highest measures of tax on labour income in the OECD for an average married worker with two children – 39.4% in 2018, compared with the average of 26.6%. 

It is little wonder, then, that Macron has struggled to deliver reform and is pushing hard for greater integration. Fiscal integration, fiscal union and ultimately shared public debt are critical if the core of the European project is to survive, particularly given today’s low-growth environment and economic challenges. Mario Draghi, the departing ECB president, said as much in his recent parting shots, unveiling the last monetary rites before Christine Lagarde takes over, as he hinted that monetary policy had reached the limits of its efficacy. 

This requires German cooperation, however. But Germany is also facing its own demons, weakening growth and perhaps a technical recession. It is increasingly a lone pursemaster, which sits ill on the German head, and has other challenges to preoccupy itself, such as the sorry state of Deutsche Bank , once the best capitalised bank in Europe. 

Macron’s vision is not shared. The Franco-German alliance that built Europe no longer drives it. The new coalitions emerging across Europe do not seek to dismember it, but they are focused on their own priorities and wish to cherry pick only those parts of the union that suit them. Within France itself, Marine Le Pen has replaced Frexit with French autonomy within Europe. 

Macron and France may well find that they are the harbinger of a new European empire. This one, however, is not that of Charlemagne. Rather, it is what his successors made it – a loose confederation of states bound by a name but otherwise pursuing different journeys and mandated by their own priorities.

Bob Swarup is principal at Camdor Global Advisors, an independent investment and risk advisory firm  

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2575

    Asset class: Core Real Estate Muli-Manager Separate Managed Account.
    Asset region: Global.
    Size: CHF 150m.
    Closing date: 2019-12-20.

  • QN-2576

    Asset class: Small Caps Equity.
    Asset region: US.
    Size: $>100m.
    Closing date: 2019-12-09.

  • QN-2578

    Asset class: Sovereign Local Currency Emerging Market Debt.
    Asset region: Local emerging markets.
    Size: EUR 950m.
    Closing date: 2019-12-19.

Begin Your Search Here
<