Saxo Group. A European Revolution

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… 

Steen Jakobsen, Chief Investment Officer, Saxo Group