November 18, 2024 - 2:30pm
The gap between US stocks and their European counterparts has now reached record levels. Over the last five years, the Stoxx Europe 600 index has risen by 25%. America’s S&P 500, however, has nearly doubled in that time. Meanwhile, as soon as the US election was called, a “Trump trade” drove sharp rises in share prices stateside. In Europe, on the other hand, it brought an end to the rally that had only just begun in some markets. While the dollar rose, the euro fell.
For now, it appears that divergence will continue. The two big economies have been growing apart for years, Europe’s recovery from the Covid-19 pandemic having proceeded far more slowly than America’s. And whereas the US is in the throes of a revolution in artificial intelligence, and China is engaged in a historic transition into renewable-energy technologies, Europe appears unsure of where it wants to go next, if anywhere.
The continent is trapped between an increasingly protectionist US and an ever more competitive China, a bad spot to be in when nearly a third of your exports are destined for these two markets. China’s successful use of industrial policy to take the leadership of key sectors such as electric vehicles and solar panels has left Europe’s slowly-adapting producers with a shrinking share of the Chinese market. Meanwhile, assuming the incoming US president makes good on his promise to slap tariffs on imports across the board, Europe’s biggest foreign market will suddenly become less friendly as well.
Reversing this divergence would require some kind of growth stimulus, of the sort Donald Trump proposes with tax cuts and deregulation. One possibility that has been mooted, and which could make a substantial difference, would be a strategy to both stimulate the economy and improve the competitiveness of its firms. Inspired by a report published in September by Mario Draghi, the former president of the European Central Bank, the European Union is pushing for the adoption of an industrial policy similar to what Joe Biden did in the US, using a mix of subsidies and tariffs, funded from the issuance of debt, to build its own renewables sector.
To date, though, Brussels has run into the objections of individual governments, which resist a continental approach in order to advance their national interests: German intransigence on debt, France and Italy favouring their own firms in awarding contracts and thus producing a lot of smaller-scale producers which can’t compete with American and Chinese behemoths, and so forth. Add in fragmented capital markets, with each country protecting its stock markets and banking systems, and Europe simply can’t mobilise the pools of capital needed to invest in many new technologies the way its rivals can.
Necessity may, however, finally force European governments to allow Brussels greater leeway to act aggressively. The key moment could come in February’s German elections. The outgoing government was crippled and ultimately brought down by infighting among parties which were only ever friends of convenience. The Social Democratic Chancellor and his cabinet colleagues from the Greens wanted to borrow to invest whereas the Finance Minister, who comes from the neoliberal Free Democrats and is a balanced-budget zealot, seemed prepared to let the economy deteriorate endlessly if such was the price of a black bottom line in the government accounts.
If a new government emerges that shares Brussels’s sense of urgency, then Europe may be able to respond to Trump by reverting to the Biden playbook. That would give the tale an ironic twist, since in its own birthplace Bidenomics will in a matter of weeks be mere fodder for future historians.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeExplain to me how Europe and Britain can compete with the US if their main goal is deindustrialization and NetZero?
Socialism has never won in a competitive struggle. Never!
Deindustrialization also means we’re defenseless. We can’t produce munitions for Israel nor the Ukraine if we have no factories.
I am becoming increasingly nihilistic about Britain and Europe right now. I’m not sure they are salvageable with the current regimes. They are all committed to big govt, expansive welfare programs, cumbersome regulations and net zero.
I am becoming increasingly nihilistic about Britain and Europe right now
The problem in Britain is that the metropolitan middle class has been getting something for nothing for so long that we’ve started thinking we’re entitled to it. We hoard the country’s wealth in our houses – wealth which we refuse to allow to be taxed – whilst insisting that the government lavish care and attention on us to a value far beyond any contribution we’ve made. Every year we get richer thanks to mass immigration and money-printing while the productive economy stagnates and public services crumble. And no government can do anything about it because we control the media, whose attack dogs – the thuggish James O’Brien for example – will crucify anyone who tries.
Yep, it’s bad. And it’s worse in Europe.
There is an asset bubble due to monetary policy across the board and not just in the UK. It’s just that normal people notice housing because a bubble in stocks, crypto or gold, at least, do not drive people into homelessness directly.
Money printing doesn’t make anyone richer unless the increasingly worthless pieces of paper (nowadays just electronic accounting units) are used to buy real assets such as houses.
The reality is that inflation was inevitable once currencies were no longer linked to a material substance such as gold or silver which is trusted by people as being of value. The Nixon Shock, detaching the US$ from gold is now working through to its inevitable results.
The reality is that inflation was inevitable …
Probably true. But the scale depends on how much money the government prints and how interest rates are managed. In a quite deliberate ploy to stimulate the housing market in the run-up to the 2005 election, Gordon Brown broke the link between housing costs and interest rates. Within a couple of years the value of my house almost doubled. A few years later, in 2009, he allowed the banks to create £400bn of new credit and pump it straight into the housing market. Within a couple of years the value of my house increased by another 50%. Good news for me – but bad news for wage earners and rent-payers.
‘Labour’ Party? Not so much.
A veil of ignorance conceals the truth from zealotry. In addition, bureaucracies pay good salaries and offer first-rate benefits.
It gets worse, because at the same time he’s raising tariff walls, Trump will demand they increase their defense budgets to help sustain NATO and/or pay the US for it’s continued presence in Europe. I fully expect Trump to threaten to close bases unless the countries where they’re located agree to some compensation, either economic, political, or both. Depending on how far he goes and how the EU responds, I expect Trump’s second administration to range somewhere between problematic and apocalyptic.
Europe thought it could evade history for decades by riding on Uncle Sam’s shoulders. Unfortunately, the old fella has awakened unwoke and is rubbing his eyes.
Europe complained bitterly when we toppled a vicious dictator, who nearly assassinated one of our Presidents. They also sneeringly dismissed Trump when he warned them about Nordstream.
Britain, Canada, and Poland were our main allies in the Gulf Wars, along with a few others. I don’t think we can count on Canada anymore, at least until their next election, and I have no idea if the UK will stand by us in the next conflict, to the extent that they’re still able, particularly under their current government.
In fact I’d say much of the Anglosphere is gradually abandoning liberal democracy for wokey, authoritarian socialism, for which I blame the US’s horrifyingly left wing academics and media elites.
And the French, of course. They loosed these ridiculous postmodernist views on naive American academics and university students, without any warning labels.
To me, energy appears to be the most significant challenge facing the EU economy at this moment. But we should also question if the US economy is actually doing that much better and why?
The most obvious answer to this is better policy and especially better companies. But honestly, the boom almost entirely relied on the Magnificent 7 and the AI hype. That seems quite fragile. If it become clear that the stock values cannot be justified by earnings anytime soon, the Western economy might be in for quite a ride.
The next question is why asset prices, especially American asset prices, are so humongous in the first place. A probable answer to this is that the fiscal stimulus – the huge amount of money printing after 2008 and during the pandemic – was a lot more extensive in the US than anywhere else.
Why? Because the US can. As Varoufakis explained, The US has the biggest trade deficit in the world because it functions as a dollar recycling factory where export countries reinvest their dollars into bonds, stocks and real estate. Using tariffs across the board would probably crash asset prices.
Low interest rates will by definition increase the value of assets, just as increasing the money supply will, c.p., create inflation.
Tech equities are risky assets. There’s no conceivable way Apple, for example, deserves its sky high valuation. Eventually someone’s phone will be better, or phones will give way to some other device, or the Tesla crowd will adopt some other plaything. Most of our tech companies, by fundamental measures, are heavily overvalued. Apple at least moves a tangible product; social media does not.
Our manufacturers, however, do make real things, as does our agricultural sectors. America also has vast amounts of natural resources, the third largest population in the world, and a consumer class that spends and produces a huge amount of goods and services. They essentially power the world economy, from Beijing to Berlin to Belize.
There’s real value there. Real things produced by real people.
There’s a lot of blarney, blather, and hype as well. And no shortage of terrible ideas – simply look at the last Presidential administration, and the legislators in that same party. They clearly didn’t save the world with regulations, taxes, defunded police, and funny money, and of course caused horrible levels of destruction, misery, and squalor instead.
They couldn’t even keep people on the NYC subways (which I used to safely ride in wearing a nice suit, from City Hall to the Bronx or over to Jamaica, Queens, just a few years ago) from being tossed onto the rails, or otherwise gorily murdered.
Progressive Democrats can often enough get themselves elected on a vision of some sort of state controlled utopia.
But if they govern by their principles, which are deeply mistaken, then predictable disasters occur. This Green Leap Forward business is equally as fatuous and awful as COVID lockdowns, defunding the police, borrowing trillions, and surgically altering deeply confused teenagers.
What this author misses altogether is that ‘industrial policy’ aimed at boosting the green economy only makes sense if, fundamentally, that sector is valuable to the economy at all.
And that is the kicker: it isn’t! Solar and wind simply don’t produce reliable energy. EVs are ok, I guess, and will find some market share. But between Tesla and BYD, the Europeans are starting slow, hampered by their long-standing ties to the combustion engine of which they were the masters. They hesitated, jumped late and made it halfway across the chasm, and no amount of industrial policy will fix that.
So what Europe needs is a radical third way – cut regulation to ribbons, slash taxes, and stop trying to steer the economy. Let the economy decide what the next best thing is, and then don’t stand in its way.
For example, what about flying cars? The EU should push to establish a system of airlanes in all major EU cities and sell its flying car technology compatible with 5G microsatellite tech, for example.
Or something else that’s even cooler that I can’t think of, but which the talented entrepreneurs Europe is always kicking over the Atlantic surely could.
The bloom is already off the EV rose in America. The people don’t want them and the car makers are noticing.
EVs were only ever half about emissions. The real reason was to drive consumption, encouraging people to buy new cars at a much higher rate than they had been and to make higher profit margins. Through the life cycle of any given product, there is a cycle where when the technology and product is new, the makers can charge a much higher profit margin because there is less competition. Over time, the technology becomes progressively easier to replicate and more competition enters the market. Profit margins are driven down and return on investment falls. These days, the auto makers barely make any money at all from the cars themselves. Most of the profit comes from the financial arms that finance vehicle purchases, selling replacement parts(or more likely licensing generic manufacturers to do so), and whatever cut they get from the service departments in their network of dealerships. Firms have tried various schemes over the years to maintain high profit margins in mature product markets, one of which is planned/forced obsolescence.
Planned obsolescence is when a firm stops making, supporting, and promoting one sort of product in favor of some other, newer product, the idea being to encourage/coerce customers into buying a new product rather than fixing their old one or buying an old one in a secondary market (used). It becomes harder to repair things if the original manufacturer isn’t making parts or allowing anyone else to do so. Their value on secondary markets also drops because of this fact.. The EV movement was a cooperative effort between the car companies, who wanted people to buy new cars from dealerships rather than older cars, and from environmentalist leaning politicians who wanted an accomplishment to point at and get climate doomers to vote for them.
The real reason for planned obsolescence can be pretty much any believable excuse the manufacturers can come up with. Did we really need a new version of MS Windows every three to five years for three decades, or did Microsoft just need an influx of cash about that often? Their usual excuse was to improve user experience, even though users tended to hate having to get used to the changes, and improving security, though there never seemed to be any point where the computer was actually completely secure from hackers. The auto industry used ‘climate change’ because ICE vehicles burn fossil fuels and EVs don’t, never you mind that the electricity to run EVs has to come from somewhere and the processes, materials, and manufacturing that go into producing EVs use even more energy. I wouldn’t be at all shocked if it turned out that the EV revolution actually increased overall emissions. I doubt many of the auto executives or politicians who embraced this nonsense ever had any doubt as to what was really going on.
The American people simply rejected the new product. They were expensive to buy and expensive to repair. They had range limits and took hours to charge. They seized up in cold weather. There weren’t enough charging stations. They simply weren’t deemed an acceptable substitute by enough of the marketplace. Given that fact, it would have taken far more heavy handed tactics to coerce people to give up their gas vehicles, tactics that would have angered voters. Moreover, once the issue became politicized, the strategy backfired doubly because it became a symbol of political alignment to own a gasoline vehicle rather than just an economic decision. People who might have had the wealth and desire to buy an EV now rejected them for reasons of political partisanship. My only consolation to the idealistic fools who bought into this saving the planet nonsense is that yes, at some point, ICE vehicles must necessarily end, as nearly every other product does. When that happens, it will be because the problems with EVs get fixed enough to capture the market and drive out competition, or some other technology to replace the ICE comes along that is a better substitute, or we run out of fossil fuels, whichever comes first.
America itself has massive oil reserves in the Baken oil sands, and in shale oil deposits under the Great Lakes. The Texas panhandle and Midlands sit on oceans of oil, as does Alaska.
And Venezuela has larger crude oil deposits than Iran. Possibly, more than the House of Saud. Russia and Assam, India have considerable oil beneath their feet, and beneath the ocean there’s still more.
We will probably perish as a species from infertility before we run out of oil.
And if we’re worried about carbon in the air, we can simply plant trees. Foresting the Great Plains, Russia, or western Canada would put all of that carbon back from where it came.
The earth is big, not little. Humans are at most 100,000 years old, in our modern forms, and our planet is four and a half billion years young.
By times, the geological record indicates, the atmosphere collapsed and flash froze everything underneath. Comets hit and blocked out the sun, wiping out the dinosaurs. Mt Tambora erupted in the South Seas, causing the atmospheric effect of a nuclear winter, creating Turner’s fantastic sunsets, and global famine.
Mom’s Audi isn’t going to be our doom.
“There nothing clean about this.”
https://youtu.be/fmbZwxEnAFc?si=Nz3jfZhbJwHe_j1z
People look out for their own, it’s human nature. Forgetting or ignoring this, the EU is on its way to the League of Nations fate. The UN still exists because people know it is only a talking shop where third world despots can park friends and family for a good living.
No, the answer is less Brussels, less Yerp. The EU (Yerp) has no demos and is doomed to fail. That and the crazy euro experiment are the reasons it is not succeeding. Germany is experiencing significant industrial decline because of the position adopted by its Government on the Ukraine War. European countries are going to have to find their own way in the world, yes through co-operation with each other but also through the restoration of their sovereignty and their own currencies.
I certainly hope so if it sends the EU, and all of the screaming eliest bureaucrats, into oblivion.
I have a feeling that 90% of new tarrifs will be directed at the Chinese Communist Party regime. Europe should have little if anything to worry about. Free AND fair trade will be the name of the game.