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Europe: Where tectonic plates collide

“All this evening I've had a feeling of destiny closing in.”

Leslie Howard (as Allan Squire) in

The Petrified Forrest (1935)

For some time, I have a feeling that the tectonic plates of history are about to move, especially for Europe. I believe we may see large shifts in the global political, economic, military and philosophical order and that these will have their most profound impact on Europe as we know it.

Allan Larsson, a former Finance Minister of Sweden and currently an advisor to J-C Juncker, has described the political-ideological situation of the past 10 years in his article; “How can we understand the times we are living through?”*. After 30 years of Reaganomics, Thatcherism and market fundamentalism, these ideologies finally collapsed with the global financial crisis. Since then we are in what he calls an empty room. A political-ideological vacuum. The current strong wave of populism is only a temporary, opportunistic surrogate for a new long-term theme or power, which we have yet to see what it will be.

A neutral observer would be hard pushed to not see that Europe is the weakest link in the developed world. For centuries Europe held a dominant position because it was the origin of modernity, of political ideology and of the industrial revolution. The history of the world was essentially Europe’s history of growth and modernity. This hegemony was solid because it was grounded in both economic and military supremacy. When they fade, so does Europe’s position of influence. What we are witnessing now are a late stages of Europe’s relative decline.

Europe seems unable to find solutions to its’ many challenges. Let’s go through some of them.

Perma-sluggish growth, lower than in the US and significantly lower than in China and Asia. The recent report by Hans-Valter Sinn describes a lack of progress in Europe’s industrial sector. He calls the modest increases in GDP a “Keynesian Flash”. Cheap-money going into non-value adding services.

The Immigration crisis, which Europe’s political and social systems seems unable to cope with or find solutions to, which has led to political turmoil and a surge in support for various kinds of populism and extreme parties.

An accelerating bi-furcation of European societies. Asset owners vs. just-about-managing, “anywheres” vs. “somewheres”, north vs south, old vs young, urbanites vs the rural left-behinds, experts vs the common man. Social mobility is in decline. Health and education are increasingly segregated. The conflict lines are many, the rhetoric hard. For decades, solidarity was the moral glue holding together nations. Now nation-centred emotions are discredited and there is no EU-wide solidarity in sight. The growing winner-takes-all economic system is very far away from Europe’s history of societal equality ideals and fair distribution.

The EU governance model is unfinished and ineffective. So in spite of increasing its’ influence and power at the expense of the national parliaments, it is without the tools or democratic legitimacy to exercise power in any meaningful way. It is mostly paralyzed by the impossibility of reaching consensus among 27 members with diverging agendas. To make things worse, the strongest national power, Germany, refuses to lead.

The Euro! Once an ambitious project designed to challenge the USD. After two decades, it is still not viable enough to be a substitute for the USD for exporters who want to find a way to deliver on already signed contracts. The Euro is stumbling from crisis to crisis while contributing to a grotesque trade surplus for Europe’s richest country while cementing the subjugation of others.

Virtual colonization by the US. There is no European challenger to Google, FaceBook, LinkedIn, YouTube, Amazon or Uber. Europe is good for extracting profits and hiding them from taxation but the Shareholder value goes elsewhere.

PwC have made an interesting forecast of economic global growth and GDP in 2050. All but two European countries, Germany and the UK, are by then outside the top-10 nations in GDP.

An illustration of how low Europe has sunk was when president Trump tore up the Paris accord and the Iran deal and then demanded obedience by European multinational companies, who immediately caved in to his threats. A powerless, humiliated Europe without a leader and only memories of grandeur and importance. So what to conclude from all this? Europe is ripe for the picking, longing for a revival, a better future where it will again matter and where its’ citizens will again feel confident that they can hand over a brighter future, a fairer deal to their children. Where will a European “New Deal” come from? That is the big question.

Concurrently with Europe’s woes, a large global geo-political conflict is building between the US and China. History shows that the economic system that produces the most wealth, wins in the long run. For the past century, this power was the US. But now we need to recalibrate and understand that the pace and longevity of China’s economic leap is unprecedented. Never before has any nation produced so much economic progress over so many years, as China has. In 1990 China’s GDP was 6% of the US GDP. It is now more than 60% and according to PwC, China will overtake the US in the next 12 years or so. In terms of spending power, China is already significantly bigger than the US because of its’ population being 4 times that of the US.

In Europe, China is patiently building its’ presence in a number of sectors; utilities, infrastructure, technology, finance/banking but also in marketing driven sectors such as luxury brands. The Chinese offering is highly attractive for European companies struggling with limited home market growth; access to a huge Chinese market and to capital from investors with a long-term investment horizon. A striking example is Volvo Cars, which after 11 years of Ford ownership and stagnant sales was sold to Geely in 2009. That year Volvo sold 340.000 cars. Volvo now sell over 600.000 cars per year of which 1/3 goes to China. Ford sold Volvo for less than 2bn USD. The current estimated valuation is between 15 and 30bnUSD. Which corporate CEO and team would not want to be part of such a journey?

The Euro tried but failed to challenge the USD. China is methodically preparing for the Renminbi to be a global alternative to the USD. The opening of the Chinese Bond market is a significant step, as are swap agreements with all the world’s central banks and the creation of new institutions such as the Asian Infrastructure Investment Bank. If the Renminbi succeeds in becoming a world reserve and trade currency, this will be a game changer for all economies. It will also redraw the political map. No more will the US be able to beat companies and countries into submission by threatening to block their use of the USD. No more will the US be able to issue limitless amounts of debt.

European leaders seem unable to bring its citizens any inspiring new big project. China is starting a project larger than anything the world has ever seen, the Trans-Eurasia Belt and Road. Bigger than the space programs of the 60s, with economic and political consequences far beyond our wildest dreams. It will also bring China and Russia closer. That is a geopolitical match made in heaven. Russia with an abundance of space and 40% of the globe’s strategic natural resources. A perfect match for an emerging industrial superpower with a big appetite for resources, space and allies on the geopolitical stage. Both are also highly militarised societies with a history of authoritarian leadership and similar views on various citizens’ freedoms.

Is all this going to be meekly watched and accepted by the US? Hardly. Especially not since China is busy building its’ military power with often creative and novel techniques such as space-based weaponry, impossible to detect sub-marines, long distance sea-skimming missiles, man-made islands etc etc. Nor has it gone unnoticed that Chinese and Russian troops are training together and exchanging technology.

What will the US response be to the possibility of a Eurasian continent united under Chinese leadership? We have yet to see.

Will Europe resist the attraction of joining this Eurasian economic and political project or will it keep its’ traditional links with an increasingly egocentric and bellicose USA?

It is not unlikely that Europe’s companies will increasingly welcome China with open arms. The prospect of joining a huge and fantastic project, accessing enormous markets, will be just too great. For European politicians the choice will be between managing decline and increased subjugation to the US or to broaden Europa’s reach across Eurasia and enjoy export driven prosperity within easy reach for one’s own country and political system. Now which politician can say no to that!

There are many question marks regarding this development. Does Europe understand and accept the values China bring and how do these relate to traditionally European values? How willing will the Chinese be to let ideas from “Old Europe” spread into its hitherto extremely successful but nation-centric discourse. History shows that trade spreads much more than goods, it also brings ideas and questions to which no system can remain inert. How will an autocratic Chinese leadership react to these? Will the Belt-and-Road need more resources than China is capable of generating? The questions are many but I believe the direction is clear.

Where can we next expect an increase in Chinese presence in Europe? Could it be in the more EU-negative parts of Eastern Europe or the poorer Mediterranean countries that have seen so little benefit from the austerity, globalization, immigration they have been sometimes forcefully subjected to? Will Europe and the EU experience a new boom in manufacturing and exports resulting from participation in the Belt-and-Road project? How will an increased presence of Chinese ownership, management etc. in Europe be perceived? As a welcome source of new wealth with a shared respect for societal egalitarian values, or as an invader bringing danger to freedoms and rights? Will the tension between the US and China escalate into more open conflict? Will Europe be forced to choose side in that? What seems very clear is that we will continue to “live in interesting times” for decades to come. Especially in Europe.

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