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November 18, 2024 - 2:30pm
The gap between US stocks and their European counterparts has now reached record levels. Over the last five years, the Stoxx Europe 600 index has risen by 25%. America’s S&P 500, however, has nearly doubled in that time. Meanwhile, as soon as the US election was called, a “Trump trade” drove sharp rises in share prices stateside. In Europe, on the other hand, it brought an end to the rally that had only just begun in some markets. While the dollar rose, the euro fell.
For now, it appears that divergence will continue. The two big economies have been growing apart for years, Europe’s recovery from the Covid-19 pandemic having proceeded far more slowly than America’s. And whereas the US is in the throes of a revolution in artificial intelligence, and China is engaged in a historic transition into renewable-energy technologies, Europe appears unsure of where it wants to go next, if anywhere.
The continent is trapped between an increasingly protectionist US and an ever more competitive China, a bad spot to be in when nearly a third of your exports are destined for these two markets. China’s successful use of industrial policy to take the leadership of key sectors such as electric vehicles and solar panels has left Europe’s slowly-adapting producers with a shrinking share of the Chinese market. Meanwhile, assuming the incoming US president makes good on his promise to slap tariffs on imports across the board, Europe’s biggest foreign market will suddenly become less friendly as well.
Reversing this divergence would require some kind of growth stimulus, of the sort Donald Trump proposes with tax cuts and deregulation. One possibility that has been mooted, and which could make a substantial difference, would be a strategy to both stimulate the economy and improve the competitiveness of its firms. Inspired by a report published in September by Mario Draghi, the former president of the European Central Bank, the European Union is pushing for the adoption of an industrial policy similar to what Joe Biden did in the US, using a mix of subsidies and tariffs, funded from the issuance of debt, to build its own renewables sector.
To date, though, Brussels has run into the objections of individual governments, which resist a continental approach in order to advance their national interests: German intransigence on debt, France and Italy favouring their own firms in awarding contracts and thus producing a lot of smaller-scale producers which can’t compete with American and Chinese behemoths, and so forth. Add in fragmented capital markets, with each country protecting its stock markets and banking systems, and Europe simply can’t mobilise the pools of capital needed to invest in many new technologies the way its rivals can.
Necessity may, however, finally force European governments to allow Brussels greater leeway to act aggressively. The key moment could come in February’s German elections. The outgoing government was crippled and ultimately brought down by infighting among parties which were only ever friends of convenience. The Social Democratic Chancellor and his cabinet colleagues from the Greens wanted to borrow to invest whereas the Finance Minister, who comes from the neoliberal Free Democrats and is a balanced-budget zealot, seemed prepared to let the economy deteriorate endlessly if such was the price of a black bottom line in the government accounts.
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SubscribeExplain to me how Europe and Britain can compete with the US if their main goal is deindustrialization and NetZero?
Socialism has never won in a competitive struggle. Never!
I am becoming increasingly nihilistic about Britain and Europe right now. I’m not sure they are salvageable with the current regimes. They are all committed to big govt, expansive welfare programs, cumbersome regulations and net zero.
I am becoming increasingly nihilistic about Britain and Europe right now
The problem in Britain is that the metropolitan middle class has been getting something for nothing for so long that we’ve started thinking we’re entitled to it. We hoard the country’s wealth in our houses – wealth which we refuse to allow to be taxed – whilst insisting that the government lavish care and attention on us to a value far beyond any contribution we’ve made. Every year we get richer thanks to mass immigration and money-printing while the productive economy stagnates and public services crumble. And no government can do anything about it because we control the media, whose attack dogs – the thuggish James O’Brien for example – will crucify anyone who tries.
Yep, it’s bad. And it’s worse in Europe.
To me, energy appears to be the most significant challenge facing the EU economy at this moment. But we should also question if the US economy is actually doing that much better and why?
The most obvious answer to this is better policy and especially better companies. But honestly, the boom almost entirely relied on the Magnificent 7 and the AI hype. That seems quite fragile. If it become clear that the stock values cannot be justified by earnings anytime soon, the Western economy might be in for quite a ride.
The next question is why asset prices, especially American asset prices, are so humongous in the first place. A probable answer to this is that the fiscal stimulus – the huge amount of money printing after 2008 and during the pandemic – was a lot more extensive in the US than anywhere else.
Why? Because the US can. As Varoufakis explained, The US has the biggest trade deficit in the world because it functions as a dollar recycling factory where export countries reinvest their dollars into bonds, stocks and real estate. Using tariffs across the board would probably crash asset prices.