Papers White Paper

Europe 2020

White Paper

In this issue of our ‘Thoughts from the Ideas Factory’ white paper series, Martin Pluck, TT Partner, takes on the persona of a German Politics Professor travelling to Poland in 2020 to lecture on changes in the Eurozone. The paper looks at some of the changes that could occur over the next few years.

Executive summary

  • Europe has emerged from its sovereign debt crisis reinvigorated and galvanised as a fiscal union underpinned by closer political integration.  
  • Concerted restructuring efforts at the national level have corrected many of the damaging imbalances which led to the crisis. Southern nations have regained competitiveness, and Germany is prioritising consumer spending and importing more.
  • Political institutions are stronger: the European Parliament can initiate legislation; the EU has a President directly elected by the people; a central European Finance Ministry has been created to safeguard financial stability and administer a common fiscal policy.  

1. Introduction

Hello! My name is Professor Jürgen Eintracht. I teach Politics at the University of Frankfurt. On this 29th day of February 2020 I’m in a lounge at Frankfurt International Airport, the busiest in Europe. It has overtaken London Heathrow mainly due to its becoming the transit hub of choice for Asian business visitors. I am waiting for my flight to Krakow, where I will give a lecture on the changing face of this continent, and more specifically the changes in the Eurozone. I expect my Polish audience will receive it well. They, after all, are the new faces of Europe. They have embraced our new fiscal union with greater enthusiasm than most. They are one of the biggest reasons why George Washington’s famous decree, “Someday … there will be a United States of Europe”, is now, in 2020, close to being fully realised.

A decade ago the Eurozone faced a crisis which threatened its existence. Today, not only is its future more secure, but through a process of economic and political reform, it has become a stronger force, capable of standing toe-to-toe with any of the world’s major powers including the evermore powerful China.

The effects of the crisis have not been reversed fully; austerity will live long in the memory of many southern Europeans, especially the Spanish and Portuguese. But the structural flaws in the European Union and in the European economy have been rectified and national budgets are vastly improved. Europe is now a fully-fledged fiscal union underpinned by properly empowered democratic institutions. We are better prepared for when we next face a crisis, whatever and whenever it may be.

Europe has had to embrace change, willingly or not. Every nation within the Eurozone has had to cede national sovereignty, a by-product of fiscal union. But, with this, we have discovered that ceding sovereignty does not mean ceding national identity or culture. Some were not prepared to go down this path: Greece ditched the euro, the United Kingdom severed its ties with the European Union, and Sweden, Norway and Denmark remain outside the currency zone (though they maintain close ties). Entrenched vested interests have been rolled back: the power of the unions in France and the South has been curbed while Germany has exorcised the inflation demon.

Structural reform programmes have reinvigorated the southern economies and also France. Germany’s obsessive compulsion for savings, exports and surpluses is evolving to a more balanced outlook; Germans are consuming, credit demand has increased. In France, there are now attractive alternatives to working for the government or the public sector. They’ve even done away with the once fiercely guarded 35-hour work week, and effected many other labour market reforms. After a combination of debt write-downs and restructuring and the issuance of Eurobonds, investors are again prepared to lend to peripheral countries at reasonable levels. This and the creation of a Europe-wide deposit insurance scheme have made the banking sector functional again.

Europe has cemented, or rather safeguarded, its place as a global trading powerhouse. Through the decisive response of the South to its debt and competitiveness problems, the region has stolen a march on the US in some areas. The love affair between Asian consumers and high-end European brands has lost none of its spark. Cultural and trade links between the Iberian peninsula and South America continue to blossom, giving Europe a valuable foothold into another major growth area. Trade between Southern Europe and Africa has grown strongly over recent years.

Poland, a long-time vocal proponent of closer fiscal union, joined the euro in a signal of its support and desire for a strong relationship with Germany and the rest of Europe. Unencumbered by vested interests and with a keener appreciation of the value of a close-knit Europe, the country’s politicians played a prominent role in persuading other countries to move to fiscal union. Fittingly, Radek Sikorski, the dynamic former Foreign Minister of Poland, now serves as the first directly elected President of the Eurozone.

In short, Europe has put in place the economic and political foundations and framework for a sustainable, long-lasting fiscal union and a prosperous and less volatile future.

2. Fiscal Union: The Holy Grail

As many were well aware (but loath to accept) 10 years ago, fiscal union was always going to be the only solution for the Eurozone. The purely monetary union without fiscal obligations for stronger countries to support the weaker was structurally flawed. The question was how it would come about and what the catalyst would be. It may not come as a surprise that it proved to be Greece, or rather ‘Grexit’, occurring in 2015 as social unrest reached such a level the country’s government had to make way for a military-led administration to restore order. With this, the realisation of how high the stakes really were finally dawned and the spark for wider change was ignited.

Faced with the prospect of a Eurozone break up, Germany finally accepted it would have to stump up the funds to bail out its weaker neighbours. First, a bank deposit insurance scheme was created to prevent mass bank runs in Spain and Italy. Institutions exposed to Greek sovereign debt were recapitalised from a much bigger European Financial Stability Fund. Bondholders took a substantial haircut on their holdings of Spanish and Portuguese debt.

Naturally, this newfound German benevolence was not unconditional. The trade-off was a fiscal union informed by a large dollop of German economic thinking. A new treaty was formed creating a European Finance Ministry with the power to enforce fiscal policy and veto national budget measures as well as responsibility for overseeing a Eurozone bank supervisor. Key fiscal policy tenets included rules to limit wage inflation and a retirement age of 68 for the whole Eurozone. Fiscal transfers from the stronger to the weaker states are now occurring automatically. Germany finally accepted that the European Central Bank must be the lender of last resort. The political apparatus of the Eurozone was strengthened with the introduction of a directly elected President of the Eurozone and a stronger European Parliament with the power to initiate legislation.

The President is elected from a group of candidates put forward by each of the parties in the European Parliament. As per the US system elections are held every four years and the President may only serve two terms.  

Although it has not been tested yet, the Finance Ministry is expected to take a more stringent approach to enforcing EU policy than has been the case in the past. A case in point is the widely flouted Stability and Growth Pact, which sets a limit on

3. Balanced, efficient and competitive

To some degree, the story of the Eurozone in the first ten years of this millennium was the story of severe economic imbalances. German growth was amplified by the huge benefits it reaped from the single currency; in turn southern countries borrowed mind-boggling sums far too cheaply, which they had no hope of repaying.

Imbalances have been addressed. The South has restored competitiveness not just relative to the rest of the Eurozone but also to the rest of the world. Spain, Portugal, Italy and even France have reformed labour markets wholesale. Companies can now make redundancies more cheaply and without facing the prospect of long-running court battles. Wages are competitive, productivity has increased and working hours are longer. Germany, having accepted the need for wage inflation and pro-growth measures is importing more. Trading patterns between Eurozone members are now more balanced. Never again, we hope, will we witness the absurd spectacle of Greece importing olive oil from Germany – while southern countries have taken market share in trade outside the Eurozone. Exports have been a corner stone of the recoveries of Spain, Italy and Portugal.

Key in this process was the weakening of the euro. As the ECB expanded its balance sheet by purchasing large amounts of peripheral sovereign bonds in the

4. Europe United: A Global Powerhouse

While once individual EU states made up half of the world’s largest economies, today only Germany and France rank among the top 10. Collectively though, the Eurozone is the second largest economy in the world. Building on its advantages in high-end markets and products and technological expertise and with the South having restored competitiveness, Europe has strengthened its international position, enhancing its negotiating power and making it a vital and desirable trading partner.

BRIC discretionary consumption has been the biggest driver of global economic growth over the past 10 years and Europe has not missed out. Many European companies now generate the majority of their sales from once-emerging (now largely “emerged”) economies. Sino-European links remain at the heart of Europe’s trade network. Asian consumers’ appetite for high-end brands such as Audi, Cartier and Hennessy remains undimmed.

5. Structural growth and recovery

Investors have done well out of Europe over the past decade as companies in the region have pressed home their competitive advantages – in particular strong and attractive brands and technological expertise.

A prime example is Volkswagen, which between 2012 and 2015 spent €50bn on new products, plants and equipment. As I drove to the airport today the roads were awash with VW cars. One in three cars sold in Europe now bear a VW marque. Not only that, but one in five cars sold in China, the world’s largest car market, are also a VW make.

This leads me neatly on to another key theme: the growth of consumption in emerging markets, which has gained real traction over the past few years. European companies have been among the prime beneficiaries of this. Aside from VW, luxury goods makers and food and drinks companies have tapped the theme with great success. Nestle, another good example, is benefiting from a big increase in sales of coffee (among other things) in China. 

The domestic recovery of the South has also been a fruitful furrow to plough. The macroeconomic problems in France, Spain and Italy led to a mispricing of good businesses. Reforms to labour and product markets have led to improved efficiency as they did in Germany 20 years ago. These markets have now re-rated.

6. Conclusion

So I will tell my Polish audience that Europe can look to the future with confidence. 

  • Through closer fiscal and political union and a more balanced, efficient economy, Europe is more resilient so better able to withstand future economic crises and downturns, and well-positioned to influence global events.
  • The region can look forward to a prosperous and productive future building on its main strengths in manufacturing high-end goods.

  • Europe has strong trade links across the main growth areas of the world and can negotiate on an equal footing with any other major power.

  • The Eurozone is the greatest example of voluntary international cooperation in history.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

If you would like information on TT’s products, please contact:

Receive our insights

Sign up to receive regular investment updates and insight about products that interest you:

Sign up now