March 7, 2024 - 4:00pm
Europe needs to go big or go home. That seems to be the message markets are sending. According to a recent story in the Financial Times, the continent’s equity markets are at a “record high” but “beneath the surface they are in crisis”: trading volumes are falling, IPOs are limited, and several major companies “prefer the appeal” of the US.
So Europe once again finds itself getting squeezed between a great-power rivalry — this time not between Russia and America, but between America and China. The Chinese state has been nurturing the development of its private sector for decades, and European governments have generally tried to manage perceived unfair advantages given to Chinese firms with tariff controls. But now that the Biden administration has responded with an aggressive industrial policy of its own, its so-called Inflation Reduction Act, or IRA, Europe feels besieged. As its firms lose foreign market share to subsidised competitors, the attraction of decamping to greener pastures is growing.
The IRA has succeeded in crowding in a lot of private investment, just as it was meant to do. But that has also lured capital from fund managers overseas. As a consequence, Europe’s stock markets, including London’s, are feeling the chill. Increasingly, firms launching IPOs are choosing to move to America, where deep pools of capital run by fund-managers with a high tolerance of risk make scaling up easier. The result has been the rise of mega-companies like the Magnificent Seven. So, for instance, just one member of the Magnificent Seven, Microsoft, is worth more than all the companies traded on the London Stock Exchange.
How to respond? Just as governments remain proud of their national defence contractors, so do they cling to their stock exchanges, the result being a fragmented structure with comparatively limited liquidity. Meanwhile, in large part because of the outsized impact of the prudent German finance ministry, Europe remains averse to industrial policy of the sort being tried in the United States. The same goes for Britain, where both major parties will run their next election campaign on platforms of fiscal prudence.
But, like it or not, the era of big government is back. European governments will probably have no choice but to either join the race or watch their rivals disappear into the distance. To compete with surging stock markets in China, the US and now India, where tech listings are multiplying, Europe will likely need to overcome its aversion to industrial policy and start assisting the expansion of its own firms.
Yet it would also help if governments could find a way to incentivise both their citizens and their fund managers to shift more of their savings into the stock market, as is the case with the US retail sector. And they will all benefit from ever more cooperation to widen their markets and deepen their capital-pools.
It’s not that Europe’s governments don’t recognise the challenge — they are trying to respond. But as we are always reminded, “recent history” often makes cooperation easier said than done.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeSome sharp British people say it is the Housing Market. With houses commanding such a huge % of income people buy them thinking of their house as a retirement investment. (which it may not be)
In USA cheaper housing, say. or Germany where they mostly rent, people put more into pensions – and not thinking their house is the big investment – use Pensions as vehicles to invest in the stock market.
Most Americans have IRA accounts – tax deferred accounts for retirement that the owner chooses where to invest – stocks are the majority way. This means working people putting more income into the market than British who channel way too much into Mortgages – INSTEAD of putting the money to work in business investing via the stock market. And loads of money into their house is – Unproductive Investing’ as it does nothing for the economy – in fact it strangles it.
The other thing is China is all messed up – but huge and the Gov runs the money fully. Second is USA is the world’s Reserve Currency – so cash from all the world flows there for very strong reasons Europe does not have.
But it does not matter – you are all doomed anyway. The WEF, AI, all wealth is in 10 international companies, then 100 Trillion $ in global gov debt, and 3 X That in ‘Unfunded Mandates’ all busted – the commercial real estate about to break banks in all the world – the wealth is all in the hands of the 0.001% and they get more every year – a simple device – they borrow for nothing, buy appreciating assets, and let inflation eat away the principal – do it over and over and over and eventually they own everything (about 14 more years) you own nothing – eat bugs, live in pods, and they own everything, even you – they will not need steel bars, chains, and whips – you carry all that yourself – you call it ‘My Phone’.
Utter nonsense.
More people than ever their own properties outright in the UK.
Yes, there is a serious problem with affordability and over-inflated house prices worldwide (not just in the UK). But the idea that people “own nothing” is patently untrue. A huge percentage (including no doubt many here) own a lot.
Your observations on pensions are not correct. Private pensions in the UK and USA are quite similar. And house prices in many parts of the US are extremely high.
I don’t think you understand economics. The “10 big international companies” don’t own anything themselves. Their shareholders do. That’s people – yes, us – through our pension funds and individual investments.
That’s not what he said. He said the wealth is in 10 international companies. We’ve just learned that Microsoft is bigger than the entire London Stock Exchange. Basically, most of the money is concentrated in a handful of super-large international companies. The problem is the concentration, not which massive pension funds own which bits.
“To compete with surging stock markets in China, the US and now India, where tech listings are multiplying, Europe will likely need to overcome its aversion to industrial policy and start assisting the expansion of its own firms.”
Who writes this garbage ?
The reason Europe doesn’t have huge tech companies like Microsoft is precisely because it does have an industrial policy devoted to propping up its existing large industrial companies … which has the obvious side effect of suppressing startups !
There’s a reason why almost none of the biggest companies in Europe were founded within the lasty 30 years. And it’s most definitely not due to a lack of intervention and “support” to “protect jobs” from national governments and the EU.
Stop subsidising failure and invest in success.
It would also probably help if instead of imposing ‘windfall taxes’ on successful firms that do manage to make a profit, they let them keep it to invest themselves, rather than having to hand it over to the increasingly bloated state to manage.