Sunday, January 05, 2025

Europe and Britain struggle in changing markets in 2025


In Europe 2024, the STOXX 600 ended the 52 weeks with a gain of 6%, according to Reuters. The STOXX and the American S&P 500 tracked each other from the early 1990s but from about 2012, the 500 never looked back.

The Financial Times at the year-end reported that Germany has an answer to US “magnificent seven” (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla).

They may have a lesser scale but in a gloomy Europe, Frankfurt’s Dax, an index of 40 blue chips, has risen 19% in 2024.

Germany's seven companies were: software giant SAP, defence stock Rheinmetall, industrial conglomerate Siemens, Siemens Energy, Deutsche Telekom, and insurers Allianz and Munich Re.

"Technological change is accelerating rapidly. Europe largely missed out on the digital revolution led by the internet and the productivity gains it brought: in fact, the productivity gap between the EU and the US is largely explained by the tech sector. 

The EU is weak in the emerging technologies that will drive future growth. Only four of the world’s top 50 tech companies are European."

Last August in a ranking of the top 50 global companies, the USA had 16 of the top 20 entries. They would add 15 more to a total of 31 firms.

Five European Union members:

Danmark: Novo Nordisk had a 14th position in medicine;

France; LVMH 26 luxury goods;

Netherlands: ASML28 chips;

France: Hermès 39 luxary goods;

Germany: SAP 40 software vendor + (the company was founded in Germany in 1972 by five ex-IBM engineers).

Mario Draghi, the former president of the European Central Bank (ECB)

Draghi is credited with saving the Euro in 2011. He is one of the heroes of the post-Second World in Europe.

He has been a Prime Minister of Italy and in September 2024 he produced a blueprint for the future of the European Union: 

The future of European competitiveness Part A | A competitiveness strategy for Europe

The future of European competitiveness Part B | In-depth analysis and recommendations 

Draghi said: "First – and most importantly – Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies.

In recent years excluding London, per capita GDP of the rest of the UK would be lower than Mississippi, the poorest American state.

Brexit is a 'slow- puncture' and a disaster

According to the Financial Times, London's output and headcount would shave 14% off British living standards, enough to slip behind the last of the US states.

However it has been pointed for example, the UK's unemployment rate is comparable to New York, and its high school equivalent graduation rate is in the top 5 among states. The UK's life expectancy at birth is also over 80, which would rank it among the top 10 states. 

Estimates by Gwyn Bevan of the LSE (London School of Economics) has the GDP per capita for 2019 for the three richest and poorest regions in the UK, Italy, and West and East Germany (in euros from Eurostat). 

This shows that the regions of East Germany were richer than the three poorest regions in Britain; and Italy’s three poorest regions were Campania, Sicily and Calabria.

The richest and poorest regions in the UK were Inner London – West (£188,000) and Tees Valley and Durham (£22,400). 

In Italy, the respective regions were Bolzano (£46,900) and Calabria (£17,000), while in Germany, they were Hamburg (£58,800) and Mecklenburg-Vorpommern (£25,600).

"Where the sun never sets?"

George Macartney (1737-1806), a native of Antrim, Ireland, and graduate of Trinity College Dublin in 1773 wrote a book on his period in office as chief secretary of Ireland — he was the second highest official in the British administration of Ireland.

Macartney was a member of both the Irish and British parliaments and he made it clear that Ireland formed part of “a vast empire on which the sun never sets and whose bounds nature has not yet ascertained."

Brexit has cost the UK £140bn so far (early last year), according to a new analysis, and could see the nation £311bn worse off by the middle of the next decade, according to a report in 2024.

Economists and analysts at Cambridge Econometrics — commissioned by London's mayor, Sadiq Khan  — have modelled how the UK's economy would have acted were it still in the European Union.

Brexit has cost the UK £140bn so far, according to new analysis, and could see the nation £311bn worse off by the middle of the next decade, according to a new report. Economists and analysts at Cambridge Econometrics — commissioned by London's mayor, Sadiq Khan — have modelled how the UK's economy would have acted were it still in the European Union.

The contours of the UK’s post-Brexit trade landscape have become clearer in 2024, with many predictions upended. 

Nevertheless, the Office for Budget Responsibility (OBR) recently reaffirmed its estimate that Brexit would reduce the UK’s trade openness (or intensity) by 15% compared to what might have been had the UK remained in the EU. 

The ‘slow puncture’ effect obscures deeper systemic issues, and recognising this will be essential for any future trade strategies put forward by this new government.

Europe is also in a parlous state

The GDPs (Gross domestic product) of the top five EU countries make up 59% of the EU's GDP, and the top 10 countries make up 75% (2023). 

The International Monetary Fund (IMF) says that GDP measures are "the monetary value of final goods and services — that is, those that are bought by the final user — produced in a country in a given period of time (say a quarter or a year). It counts all of the output generated within the borders of a country."

The US bank Goldman Sachs forecasts that Germany's real GDP is expected to grow by only 0.3% in 2025 while the Bundesbank (the German central bank)  projects a more modest 0.2% increase, while the Kiel Institute forecasts stagnation at 0.0%.

Europe is stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines.

In fact, there is no EU company with a market capitalisation over €100bn that has been set up from scratch in the last fifty years, while all six US companies with a valuation above €1 trillion have been created in this period.

This lack of dynamism is self-fulfilling.

As EU companies specialise in mature technologies where the potential for breakthroughs is limited, they spend less on research and innovation (R&I) – €270bn less than their US counterparts in 2021.

The top 3 investors in R&I in Europe have been dominated by automotive companies for the past twenty years.

It was the same in the US in the early 2000s, with autos and pharma leading, but now the top 3 are all in tech."

Gross adjusted household disposable income per capita of OECD countries in 2021 (in US dollars):

US $63,000; Australia $45,000; Switzerland $44,000; Germany $44,000; Netherlands $41,000; Sweden, Denmark and the UK $37,000.

European Union $35,000.

Italy $34,000; Ireland $33,000.

Values have been adjusted for purchasing power parity and take into account both the payment of taxes and social contributions and transfers in kind received by households (such as health or education provided for free or at reduced prices by the government).

Europe has been lagging behind the United States in several areas, including productivity growth, GDP per capita, and technological development.

GDP per capita

Since 2000, real disposable income has grown almost twice as much in the US as in the European Union (EU), on a per capita basis. This is due to a number of factors, including:

Lower productivity

Europe's productivity growth has slowed down, leading to a widening gap in per capita income with the US.

According to the World Intellectual Property Organization, about 70% of the gap in per capita GDP between the US and the EU is due to lower productivity in the EU.

Industrial policy

The Inflation Reduction Act in 2022 and the EU's Net Zero Industry Act in 2023 have led to significant investment in green technologies.

Growth in the industry sector

In the US, hourly labour productivity increased by 8.8%, while in the Euro Area (20 countries that have adopted the Euro). It increased by just 0.8%.

Wealth gap

More than one-third of US households earn more than US$100,000 a year, while there are fewer than 3 million millionaires in the UK, France, and Germany each - maybe less.

Investment in stocks

Americans are more likely to buy stocks than Europeans, who hoard trillions of euros in low-yielding bank deposits.

Europe's stock market is lagging behind the US by the most in nearly 30 years — a trend that's likely to worsen as the election of Donald Trump drives a global preference for US assets.14 Nov 2024.

Large corporations, for example, invested 60% less in 2022 than their American counterparts, and grew at two-thirds the pace, according to a report by the McKinsey Global Institute.

Other factors that contribute to Europe's economic lag include:

Regulatory and administrative barriers in the single market;

Higher industrial energy costs;

Challenges of getting more than two dozen countries to act as a single unit ;

Growing international conflicts and increased use of national policies to steer business.

Generative AI is experimental.

Rome wasn't built in a day.....

Dr Draghi knows that the neglect of years will take years to remedy.

The Commission"s plans to issue up to €90 billion in EU-Bonds from January to June 2025, and around €160 billion in total for the year.

The EU budget for 2025 is €199.4 billion in commitments and €155.21 billion in payments. This is a 6% increase from the previous year.

According to PwC, the top accounting firm, the world's largest economies in 2050 are projected to be China, India, and Indonesia.

As a result, six of the seven largest economies in the world are projected to be emerging economies in 2050 led by China (1st), India (2nd) and Indonesia (4th). The US could be down to third place in the global GDP rankings while the EU27's share of world GDP could fall below 10% by 2050.

That prediction was made in 2017 and an update was published in 2023.

PwC said, "However, the rapidly evolving nature of economies, societies, technologies and policies across the world since 2017 means that the pace at which economic convergence between the West and the East happens could take longer than initially anticipated." 

In 2023/2024 Enrico Letta, a former Italian Prime Minister, had a journey across Europe that involved 65 European cities and 400 meetings.

He wrote in Much-more-than-a-market "During this journey, I also experienced firsthand the most glaring paradox of EU infrastructure: the impossibility of travelling by high-speed train between European capitals. In a continent as small and densely populated as ours, which has also embarked on the path of environmental sustainability, it would have been natural to travel by train, the quintessential green mode of transportation.

However, this is currently impossible and seems unlikely to change in the near future, as concrete operational plans remain merely theoretical. This is a profound contradiction, emblematic of the problems of the Single Market. Indeed, our continent quickly and effectively developed the high-speed rail system, but except for the Paris-Brussels-Amsterdam axis, it remained within national borders."

[The phrase “Rome wasn't built in a day” originated in medieval France and is a translation of the medieval French phrase Rome ne fu[t] pas faite toute en un jour.

The phrase was first published in the 1190 book of poetry Li Proverbe au Vilain. The English writer John Heywood first used the phrase in English in his 1538 book A Dialogue Conteinyng the Nomber in Effect of all the Prouerbes in the Englishe Tongue. The phrase is used to convey the idea that great things take time to create and that you shouldn't rush greatness.

The Latin version of the phrase is Roma uno die non est condita. Queen Elizabeth I, used the Latin version in a speech at Cambridge in 1563]

Europe imports 80% of digital tech; trade-to-GDP ratio above 50% and German debt brake

Germany again the sick man of Europe