A European Revolution

Steen Jakobsen
Chief Economist & CIO

Summary:  Can the Greens win a pivotal election in Germany? If they do, EU debt could start to spiral.

Liberté, égalité, fraternité, or doing away with privilege of the ancien regime, was the most important slogan for the French revolutionists of the late-18th century. Now once again there is a growing sense of a ‘Revolution in Europe’ as voters, especially the younger ones, are leaning hard against the status quo in most countries. All eyes are on the German election on September 26th, where a Black-Green alliance is the most likely outcome, but where there is also an outside chance of the Greens taking the most votes and getting the keys to the Chancellery!

This would be a revolution. The Green Party is very pro-EU, anti-Russia and China, against the Nordstream2 project and, not least, very much in favour of removing the German Schuldenbremsen, or “debt brake”, that drives the policy of reflexive German fiscal austerity. This could mean that we wake up to a new Germany and Europe on September 27th, the day after the German Election.

The German election will most likely also show how the young generation’s politicians need to be different. Ms Merkel, a child of East Germany and a Russian speaker, has been frugal and patient, and often used a scientific modus operandi of letting facts and time dictate the pace rather than allowing the social media rollercoaster to drive the political agenda.

Ms Merkel was personally a big part of the German export miracle but she failed to invest in German infrastructure. This has resulted in Germany having one of the slowest internet speeds, lowest adoption of digital technology, and a policy that is usually about correcting previous years’ mistakes rather than creating vision and hope. She was the ultimate compromiser. But the young people of Europe want the opposite: a vision for a Europe, one that is greener and with the hope of a good job and access to the real estate ladder, not one that is about old politicians looking at yesterday’s priorities and defaulting always to a policy of not rocking the boat.

Actually, one important revolution in the EU has already taken place and it adds to the stakes of this German election. Last year the EU Commission secured the mandate to issue mutual EU bonds. The saying goes that one should never waste a crisis and the EU acted, even if the size of the programme relative to total EU fiscal outlays is modest at best. But the significance can’t be over-emphasised, and now that we have the “instrument” of EU bonds in place, it will be up to the German election to begin growing the political will for a full commitment to the EU project– a project built on a shaky foundation of fiscal sovereignty for individual EU members who have no control of the currency or monetary policy. 

With a black-green German coalition this is going to change – perhaps slowly at first, but far more quickly if the Greens are in control. We see a future in which the EU is going to mutualise an ever-larger portion of member countries’ debt. And the justification for this fiscal mutualisation drive is there for the taking–primarily the climate agenda, but also issues of inequality, weak infrastructure and foreign policy threats in a less secure alliance with the US. The EU has said that the EU bonds are a temporary measure, but the same was said in the 1960s when Denmark introduced a comprehensive VAT of 9%; it now stands at 25%.

When you give politicians and an overall political system a carte blanche to both raise and spend money, they will. Just look at the 2021 EU Budget. The EU is issuing up to 100 billion euros in their SURE programme to support jobs and keep people in work. Their NextGenerationEU plan, sized at 800 billion euro, aims to repair economic and social damage from Covid-19 and make Europe greener, more digital and more resilient. The limit so far is 5% of the EU budget–want to make a bet where it is in 2050?

The revolution in Europe is officially about a move to the political left, with an acceptance of more mutualisation, the use of Modern Monetary Theory and a very explicit green agenda in this new era of fiscal dominance. It comes with the very best intentions, but will inevitably prove to have a very dark side as well, and that is the shrinking role of the private sector that has driven economic dynamism in every era. The new priorities and agenda will increasingly see the “invisible hand” of Adam Smith yielding to a an all-too-large EU public sector that evolves to look more and more like the creaky, late-stage planned Soviet Union economy than a Europe heading to a brighter future. Vive la revolution.

This outlook has our team fully engaged on the impact of a potential Green win in Germany, the impact from too many EU bonds, the changing demographics and the new non-European UK. 

Explore Saxo’s products here

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.