Building a big beautiful Europe

Katie Martin (0:06)

Pushkin. Europe has spent years wringing its hands over its markets. They are small, they're fragmented, they've been getting eaten alive by their faster, stronger, more handsome US cousins. Last year, some of the real heavyweights waded in. Mario Draghi, former head of the European Central Bank, and Enrico Letta, former Prime Minister of Italy. Both of them saying, come on guys, get on with it. Now, the urgency is rising. The desire among big investors to bulk up on assets outside the US is building. So today on the show, we're asking, can Europe get its act together?

This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets economist here in insanely hot London, and I'm joined down the line all the way from the US of A by that guy, Robert Armstrong, bringing the heat to the Unhedged newsletter. Rob, you're not in New York, right?

Robert Armstrong (1:13)

No, I am in Long Island at my mother-in-law's house. So if there's any mother-in-law type events during the show today, that's why I'm in her domain.

Katie Martin (1:25)

Okay. Is it, may I ask, insanely hot? Because Europe is in an actual oven at the moment.

Robert Armstrong (1:34)

No, it's not that hot, but it's so humid here that if you clap, it starts to rain, so.

Katie Martin (1:41)

Now listen, normally, I can barely get you to acknowledge that Europe is a thing that really exists in real life. And then you did an interview with Enrico Letta, and now you're all in. Tell me all about it.

Robert Armstrong (1:55)

It's true. So Enrico Letta is the one-time Prime Minister of Italy some time ago, and led the Italian Democratic Party. I think I'm naming that party correctly, briefly as well. And now he is an academic and a kind of Europe smart person. And he released this report that said, look, it's time to have proper integration of the European single market. And the gist is, in the struggle to get the single currency, the Euro, certain crucial things were left out. And specifically, the financial system and a couple of other crucial industries, energy, telecoms, weren't fully integrated. And the thrust of his report is, now is the time.

And the thrust of my conversation with him, interestingly, was, now is the time because Trump. Trump is saying America is stepping back, and now we have an opportunity to step forward. So it's really, it is kind of a kind of unintended consequences thing, or maybe it is an intended consequence, actually. I take that back. Of Trump's kind of quasi-isolationism is that, I think, and I don't think Leta is alone in Europe, by the way, in thinking, yes, Trump is hostile and that's all very bad, but he's opening a door for us that we need to walk through.

Katie Martin (3:19)

Oh, yeah.

That is a pretty mainstream view. But like, maybe just to rewind a tiny bit, particularly for our listeners in the States, you've got this one currency that encompasses a lot of the European Union, not all of it, but a lot of it. But what you don't have is a fiscal union, right? So there's no single entity that controls taxing and spending across the region. That's still something that's left to the individual member states. You still have loads of different banking and company and insolvency regulation that pertains to individual states, but not to the whole thing. So that's one of the things that has really held back European capital markets. Because say you issue a bond in, I don't know, for the sake of argument, Italy, and you want to sell it to somebody in, for the sake of argument, Germany, there's paperwork. It's a pain in the ass. So it's just difficult to really make this a fully functioning, seamless capital market like you have in the US.

Robert Armstrong (4:24)

And I think we should note, it's not just the logistics. It's sheer depth. The fact that the bond market and the financial products markets are not integrated means they don't have that depth and liquidity that financial markets care so much about, which means the debt is not as inexpensive for the issuers as it would be. There's not as good a market for it for buyers. And one consequence of this is here is Europe, a country whose aggregate GDP is as big as a US, a China, broadly speaking, in the same league. But where do all its pension savings go? There shouldn't be just like a massive wall of European savings that like is bestride the financial world saying what it wants and getting it. But instead, it's chopped up into all these little pieces and mostly goes to America. So it actually contributes to the American exceptionalism thing that we've talked about on this show.