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.
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.