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Europe: Go big or go extinct

Europe: Go big or go extinct
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If Europe does not get its act together, it will be crushed in the ongoing geopolitical clash of the titans, just as Tom Cruise stood no chance time and again in the 2014 film, "Edge of Tomorrow."

"Edge of Tomorrow" was a Hollywood spectacle set in 2020: aliens are attacking Earth and the inexperienced Major Cage — played by Cruise — dies within minutes, but ends up in a time loop. He consequently always finds himself in the same fight and dies again and again. But he learns new skills in every fight, and each time Cage can offer more resistance.

I do not expect an invasion of aliens or an attack by sea monsters in the coming year — such as in "Pacific Rim," another action-blockbuster set in 2020 — but it looks as though we will be confronted again with the same problems and concerns as in recent years: low productivity growth, rising debts, more signs of de-globalization and increasing nationalism.

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Tom Cruise perfected himself by repeating the situation over and over. Still, I very much doubt that we will see structural reforms that will significantly boost productivity, deal with debt, or pave the way for more international cooperation any time soon.

In "Edge of Tomorrow," Cage’s partner says at some point: “What do we do now?” Cage replies: “I don't know. We've never gotten this far.” The financial markets and economies have also ended up in uncharted territory:

  1. Central banks have inflated their balance sheets to massive levels in an unorthodox manner and lowered interest rates to historically low levels.
  2. Unemployment has reached ultra-low levels in most Western countries, yet central banks keep pumping money into their economies.
  3. Total debts of many major economies have soared to record highs.
  4. The Western world, in particular, is aging rapidly; our pension and health care systems are not geared towards this development.
  5. Stock markets have hit levels that have hitherto not been reached.
  6. For the first time since the emergence of modern capitalist democracy, the West seems to be gradually overwhelmed by the rest.

It seems a given that 2020 will not be nearly as good as 2019 for investors, given all the underlying problems and vulnerabilities. Europe greatly relies on the rest of the world, so it remains to be seen whether major steps in the field of the energy transition, for instance, will be able to sufficiently offset persistent weakening growth in China and the U.S., for example.

Global growth will be affected by ongoing political unrest. Protests in Hong Kong have shown the disastrous impact of political instability; the city is going through its first recession in a decade owing to the turmoil. In Latin America, the interplay between economic malaise and protests has a far-reaching impact, with some speaking of a lost decade for the continent.

Apart from the economic impact of protests against issues such as inequality, economic malaise, and corruption, tensions between authoritarian countries and the West, in particular, are set to rise in the coming year.

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Although the Sino-American trade war has cooled off, more and more initiatives for economic decoupling are evident in both China and the West. This is part of the geopolitical struggle between America and China and, more broadly, between authoritarian regimes and the West. The economic impact of this struggle will increase as politics and economics merge to an ever greater extent.

On the other hand, the pressure on governments by the International Monetary Fund and the European Central Bank, among other institutions, to step up fiscal stimulus – as well as support for this — has increased in the last year.

Various countries have seen growing enthusiasm for this among leaders belonging to political families who are not normally keen to increase the government's share of the economic pie; think of Britain's Boris Johnson and Germany's Angela Merkel.

Fiscal stimulus will, therefore, offer a temporary solution if the economic headwind indeed increases. However, this policy does not address the debt mountains (far from it) and rising global geopolitical tensions. 

One thing is crystal-clear: In a world with giants such as China and the U.S., in which the tagline of the aforementioned Pacific Rim — go big or go extinct — seems to be valid, small and middle powers need to band together to stay on their feet amid all the political, economic and market turbulence.

This means that this year, Europe will have to make significant progress in strengthening the Eurozone, closing ranks on addressing climate change and the energy transition, taking defense cooperation to the next level, and preventing itself from being played off against each other by China, Russia, and the U.S. 

Andy Langenkamp is a senior political analyst at ECR Research and ICC Consultants, global market research firms based in the Netherlands. He focuses on global economic and geopolitical impacts on world financial markets.