Europe stands at a crossroads. The region faces a defining moment in which it must redefine its role in a rapidly changing world, one where external support can no longer be assumed.
Europe must choose whether to take control of its destiny or risk having its future shaped by others.
A key part of this transformation hinges on Germany fulfilling its pledge to unlock its fiscal potential by strengthening its defence and modernising its infrastructure.
Should that shift occur, I see compelling return opportunities for European markets over the coming years.
The path ahead
The opportunity for a new, strong Europe starkly contrasts with how Europe has been perceived over the last 15 years.
During this period, the region has pinched pennies to save the banking sector and the euro, which was also in doubt at the beginning of the last decade.
Europe must choose whether to take control of its destiny or risk having its future shaped by others
Following the financial crisis, the banking sector needed to increase its capital base and reduce lending.
At the same time, Europe outsourced large proportions of its industrial jobs to China. In doing so, Europe undermined support for its own political system. However, European politicians are now beginning to understand the direction Europe must take.
Time for autonomy
The new path lies in reducing dependence on the US for defence, securing energy supplies independent of Russia and the US, and lessening reliance on China for the industrial value chain.
For instance, Europe needs to establish chip infrastructure and generally bring industrial production back, not manual labour, but automated production, which, in turn, creates many service jobs.
Is Europe the place for value investors to look next?
It took 20 years to dismantle Europe’s production value chain, driven by the argument of cheap labour.
However, cheap labour no longer exists, and Europe cannot afford to end up in a situation where it cannot obtain goods or where society grinds to a halt because a container ship runs aground in the Suez Canal.
Rolling back the value chain and transitioning Europe to become more autonomous will take most of a generation.
But it is Europe’s only option. I am optimistic about Europe’s future if it can break the negative cycle.
Inclusion and resilience
I believe Europe is strong enough to stand independently and compete with global powers like the US and China, even with the current political challenges.
There may be no Donald Trump in 10 years, but the underlying populist forces will persist. Dissatisfied people will always vote for someone who speaks their language until they no longer do. So, there will always be a new Marine Le Pen and a new Trump. This risk must be eliminated, and it is possible.
It took 20 years to dismantle Europe’s production value chain, driven by the argument of cheap labour
This transformation must also involve so-called socially inclusive goals, which were part of the more than 170 recommendations made by former Italian Prime Minister and European Central Bank President Mario Draghi in his recent report on strengthening Europe’s competitiveness.
Growth driven by rising stock and house prices is no longer sustainable. Growth must also encompass a social dimension that reduces inequality and increases prosperity for all Europeans; otherwise, the welfare systems will not survive.
Crisis to progress
I understand why many people might be concerned about the current developments. But looking back at recent economic history, we see that things often change for the better during periods of panic.
At the peak of an economic cycle, we just want it to continue. However, in severe events, such as the financial crisis, some changes can bring long-term benefits.
Today, a robust banking system has consistently proven its value since 2009. The earlier financial challenges were overcome, and we will solve today’s problems, too.
René Petersen is lead portfolio manager of Nordea’s Empower Europe strategy.
