Geopolitics And The Future Of Europe — In The Aftermath Of Terrorist Attack In France
Ian Bremmer, Founder of the Global Risk Assessment firm, The Eurasia Group, was interviewed on CNBC’s Squawk Box this morning on the terrorist attack in France, POTUS Obama’s failure to attend, upcoming Greek elections, the Eurozone economy, Britain possibly voting to leave the EU, and the growing anti-immigrant, populism movement on the continent.
Mr. Bremmer said he was “astonished” that POTUS Obama, nor the VPOTUS, a Congressional Delegation, or even Bill Clinton,” was requested by POTUS Obama to represent the United States at the “Unity Rally,” in Paris on Sunday, which is estimated to have attracted as many as 4M citizens, — a larger turnout than when the allies liberated France from Nazi Germany. Mr. Bremmer called this an “enormous moment,” “a rare opportunity,” in the history of France; and, a glaring oversight/huge unforced error by this White House. Radial Islam is a growing threat in the Middle East and North Africa, and the Boko Haram’s recent killing of nearly 2,000 civilians; and, an al-Qaeda attack in Yemen were overshadowed by the Paris attack.
Mr. Bremmer is concerned about the growing right-wing and populist movement on the continent; and, what it might mean for Europe going forward in 2015 and beyond. Despite yesterday’s “Unity March” in Paris, Mr. Bremmer said that France is “a deeply divided country,” and recent French polls shows as much as 30 percent of the populace supports the right-wing, anti-immigrant, anti-Muslim stance. The treatment of the 8 percent Muslim population is appalling, he said, as they feel disenfranchised, discriminated against, isolated, and little hope about their economic future.” Unemployment among young Muslim men is greater than 50 percent; and, there is little to no prospect of moving up the economic ladder — in any reasonable time frame — if at all.
In a recent interview with The Citadel Investment Group’s Ron Wexler (Citadel’s Global Equities Group), Mr. Bremmer said that “globally, we’re becoming more equal; but, within Europe — life is becoming more and more, unequal. The national identity in Europe is not “you can make it. There is no European dream, like there is an American dream,” he said. Instead, it is, “the government provides for all these people — you will have a good life.” That model is failing. Clearly,” he said, “this is the biggest issue.”
“The geopolitics of the world is are making Europe much more fragile. The transatlantic relationship is less important than before. People say NATO is relevant; but, NATO is only relevant to Poland, the Baltics, and Germany, — but, not to Spain and Italy.”
“The biggest threat, clearly,” he argues, “is Russia. And, if it were not for the downing of the Malaysian Airlines flight, I believe the Europeans would have already split from the United States on sanctions. We now see the French and other EU countries saying they want to reduce, or remove sanctions — if the cease-fire holds in eastern Ukraine. Not if Russia gives back Crimea, or pulls their troops out, just of the cease-fire holds!”
“As the weather gets colder, gas becomes a big deal; and, the impact of sanctions starts biting other sectors. The Europeans will continue to back off a harder U.S. line…to avoid [in an attempt to] falling back into recession.”
Citadel’s Chief of their Global Equities Group, then talked about the economic outlook for the Eurozone in 2015 — and, to no one’s surprise — it isn’t good. “The first concern is a lack of growth,” Mr. Wexler said. “To set the stage,” he remarked, consider two figures. First, the current level of economic activity in the Eurozone is $50B less than it was in 2008. And second, the unemployment rate has shot up from 7.2 percent, to 11.5 percent. By comparison, the U.S. real GDP has grown by over $1T; and the unemployment rate has fallen below 6n percent.”
“As we look forward,” Mr. Wexler said, “Europe faces a set of supply-side challenges. On the demographic side of the equation, the working age population, which had been contributing 20-50 basis points of growth — is expecting to start contracting by the end of the decade. The productivity side of the equation isn’t rosy either,” he added. European economies need structural change and reform; but, Mr. Wexler has doubts that there is the political will and courage to do so. “This challenging growth environment creates a second concern: low inflation turns into deflation. Once deflation expectations become entrenched, economies have a tough time recovering. Deflationary expectations create further disincentives to spend. They also create a third challenge: fiscal sustainability.”
Germany, the Eurozone’s largest economy also faces significant headwinds. “The level of [economic] activity in Germany is only 3 percent higher than it was six years ago,” Mr. Wexler noted; and, “there are several notable headwinds. First, there is a concern that Germans will ultimately need to pick up the tab for excesses created in the periphery — down the road. At the margin, this increases the incentive [by Germans] to save, and a disincentive to spend. As a result,” he argues, “you aren’t seeing material gains in consumer spending…which represents 53 percent of Germany’s GDP. Consumer spending is only growing about 1 percent per year. Moreover trade, which had been contributing about 50 basis points of growth, appears to have stalled as of late. There are certainly some pockets doing better than others, but in aggregate, gains have been modest,” he concluded.
Mr. Bremmer said he “was fairly negative on Europe. There’s no question that lackluster growth has reduced the austerity rhetoric, we have heard from Brussels and Berlin. That’s why you see [European Central Bank (ECB) Chairman] Mario Draghi pushing interest rates down; and, why there’s so much talk about quantitative easing in 2015.”
“The austerity movement was a response to the economic crisis in Greece, and the periphery. But, looking forward, we’re not close to another European crisis right now. Absent that — major reform will not happen.”
“In Europe, I am concerned about ISIS; and, the potential for more terror. I am concerned about the potential for violence for violence from immigrant communities that are not integrated the way they are in the United States. I have a lot of concerns about Europe; but, none of them reach crisis level that will motivate European governments to take steps needed to restore growth,” Mr. Bremmer said.
“It is very clear that the winner in the single winner of the Russia/Ukraine crisis — is China. The Americans said to China, “You need to support the sanctions process to be part of the international community.” The Chinese said, “We have no interest. We’ll get a better deal from the Russians.” The 30yr.- $400B gas deal between China and Russia is, according to Putin, the biggest in the history of post Soviet-Russian gas sector.”
FYI, Russia’s credit rating was downgraded on Friday, by the rating’s agency – Fitch — to BBB-, from BBB, “citing sharp falls in oil and the devaluing of the ruble. “The economic outlook [for Russia] has deteriorated since mid-2014; and oil, Russia’s main export, lost more than 50 percent of its value in 2014.” FYI, Russia based it’s 2015 budget forecast and deficit, etc. on $60 oil — and, we’re now within an earshot of $40.
I think most of the investment pros are much more pessimistic on the Eurozone’s economic outlook, with Greece perhaps set to elect a left-wing Parliament later this month, the burgeoning populist and right-wing movement across the continent, high unemployment among the youth, and the threat of homegrown terrorism. There are even those like Mr. Bremmer who see a better than even chance that England decides to leave the EU by 2017 — if not sooner. The great EU-single currency experiment has been an abysmal failure; and, things are not likely to get better anytime soon across the pond — according to a lot of those who have to make investment decisions on how they see things playing out. If you follow the money — this isn’t a good news story right now. V/R, RCP