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The sun sets over the banking district of Frankfurt, Germany on April 21st. Kai Pfaffenbach/Reuters
Ludovic Soubran is Allianz's chief economist.
Despite the outrage that Donald Trump's policy announcements often provoke, European business leaders don't seem too concerned about the possibility of him becoming president again. Some people are even more optimistic.
Even the unilateral trade moves that Trump predicted don't seem to change the equation much.
Trump's protectionist policies could provide European business leaders with political cover to justify moving production out of Europe.
The incentives to move capital and production out of Europe go far beyond the often cited lower energy costs. In the West, labor productivity in the United States grew on average 0.8 percentage points per year faster than in the euro area from 2008 to 2023. The East has high growth potential and associated investment opportunities.
Either way, many governments are keen to attract and accelerate investment rather than delay or deny it, as is common within the European Union.
The EU is good at developing almost all regulations and plans, but it often underperforms when it comes to implementing them. To take just one example, only 55 per cent of the EU's Digital Decade goals are currently expected to be achieved by member states by her 2030 target date.
No wonder patriotism is fading among European investors. There is even a sense among investors that the EU's economic situation is increasingly similar to that of Hong Kong, which returned to China in 1997. Business leaders who made their fortunes as a bridge between mainland China and the rest of the world see the writing on the wall as the Chinese Communist Party shows signs of shifting the island's priorities and begins cashing out.
In Europe, more and more people are voting with their feet and taking part in production. What is described as deindustrialization in the European debate is nothing more than increased industrial investment in the United States and other fast-growing economies around the world. Either way, it's a clear vote of no confidence in Europe.
Indeed, one could argue that the EU, despite its grand ambitions, is becoming more or less a moderating variable of globalization.
Consider the efforts to include non-trade issues in the trade agreements pursued by the EU. In the abstract, the intention may be laudable, but from Latin America to India, the EU has little, if any, acceptance of it. Indeed, China is seen as acting against its own economic interests, and in particular grossly overestimating its own economic power, attractiveness, and dynamism.
To restore overall competitiveness relative to the United States, the next European Parliament must urgently address the obstacles to higher productivity growth. Top priorities should be to reduce red tape and overregulation, overcome problems that hinder the quick and timely absorption of EU funds, renew efforts to deepen the capital markets union and improve digital capabilities. It is.
While U.S. industrial policy, including the CHIPS Act and the Inflation Control Act, has encouraged increased private sector capital investment, Europe has not experienced the same degree of crowding-in. This pattern continues. While the EU's programs have been criticized for being too complex and detail-oriented, U.S. tax breaks for manufacturers have been praised for their simplicity.
Furthermore, vested interests of European nation states are hindering progress in creating a capital markets union. This comes at the expense of important tools that could enhance cross-border risk sharing, reduce dependence on bank financing, improve capital allocation, support the energy transition, and foster higher economic growth. It was realized.
All this raises the question: what needs to be done to bring investor patriotism back into the picture as a decision-making factor for European companies? The answer is quite simple: both the EU and member states' governments need to move fast on a long list of things that need to be done.
That may happen sooner than many currently expect. There is a growing awareness, not just among younger generations but across the globe, of the need to adapt to new competitive realities. This will require strengthening the forces of economic growth, discarding bureaucratic mindsets, and a willingness to abandon outdated assumptions.
In the process, we will also need to rethink the increasingly adversarial relationship between business and government. Giving more leeway to entrepreneurship is an old European virtue. Reinvigorating it is key to old Europe's success in the future global economy.
