Market Thinking

making sense of the narrative

Made in EU 2025?

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As the US seems to be turning into late 1980s Japan, an Enterprise Owned State (EOS) becoming more isolationist as asset prices and the currency soar – and we all know how that ends – it strikes me that there is an interesting play for Europe. To become more like China.

I have often used the comparison with the European Continent as a way of describing China to western investors. It is approximately the same size; from Harbin in the far north East down to Hong Kong in the South is about the same distance as from Helsinki to Gibraltar, with an equal divergence in people, dialects and climate.  In an administrative way it could also be seen as similar, the Chinese regions being the equivalent of EU countries, local government debt being the equivalent of EU sovereign debts – ultimately backed up by the Chinese government in the way that European Debts are effectively (though not officially) backed by the ECB. The EU does not have its own army (yet), but it is acquiring the other trappings of State, which of course is one of the main drivers for the Leave campaigners, in this scenario putting Britain in the role of, say Taiwan.

But this is not a post about Brexit, rather to consider what a post Brexit administration in Brussels may consider their future role to be, for I suspect that while many in Europe and the EU are indeed still caught up in the Brexit debacle (sorry, no other word for it regardless of which side you stand) there are some wise heads considering the longer term, after all that is what you have the luxury of doing if you are a Beijing Bureaucrat, or indeed a Brussels one. The obvious point here, to me at least, is for the EU to take a central role through Industrial Policy, a ‘Made in Europe 2025’ initiative if you like and the most obvious centre piece is likely to be through the medium of the Climate Change Industry.

Climate Change is arguably an even bigger emotional political construct than Brexit but it is important for investors to remain impartial, for we should never forget that we are trying to anticipate the world as it is likely to be, rather than as we think it should be. One side believe Climate Change to be the biggest threat of the coming century while the other believes it to be the biggest fraud. The activists are trying to force investors to allocate their capital according to their (the activists) wishes and they are succeeding. The science may not be settled, but the politics largely is. 

However, rather than building investment portfolios on the basis of Climate models that may or may not come true, we should be building investment portfolios on the basis of the policies that are likely to be put in place in anticipation of of those models. In the 1970s, the French put in place a number of Grands Projects that delivered, inter alia, Nuclear Power and a high speed rail network, both of which added meaningfully to productivity and competitiveness for years afterwards. The EU are already building an updated version of the latter. The debacle, that word again, of HS2 in the UK is actually part of the Trans-European Railway (TEN-R) that dates back to the 1990s. In effect this is like the internal aspects of China’s One Belt One Road system and in a new era of flight shaming, shifting internal European travel away from airlines to high speed rail (as China is also doing) would be ‘good’ policy.

Meanwhile, there are other initiatives already in the background for energy and communications integration. These could be accelerated, particularly a smart grid, enabling better energy balance on a Europe wide scale. An acknowledged failure of renewables is an inability to effectively store excess energy production, so reallocating it efficiently when it does occur – and slowing down traditional energy production to compensate – is an obvious common sense policy initiative. The Joint Research Centre of the EU lists hundreds of projects already underway. Many of these are in the R&D phase, but a determined acceleration could be a way for the EU to define its purpose beyond the political arena.

Germany for example knows that diesel gate and Climate Change have already severely damaged its auto industry. France too, has an auto industry skewed heavily towards diesel. A co-ordinated push towards hybrids and in particular a directive for public service vehicles to be electric would be an obvious initiative. 

Bottom line, the Green Industrial Complex are starting to dominate policy initiatives in the EU, moving it away from a focus on trade and agricultural subsidies towards a form of Pan Europe Industrial Policy that has, what looks to me like, unstoppable Political Momentum. Some industries (and consumers) will be taxed and others favoured in a ‘made in EU 2025 ‘ initiative. Rather than allowing our actual capital allocations to become a matter of activists’ policy, we should be looking to manage our portfolios in the context of a better understanding of how their actions are driving broader public policy.

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