Is Europe Sinking?



By Hatem Dhiab
05/03/2019


Karl Marx once famously said: “History repeats itself: first as tragedy then as farce.” After a brief interlude from centuries of intercultural conflict, destruction, and chaos, Europe is back at it. The European Union (EU) is currently in the throes of political dislocation so farcical that it now threatens the peace and prosperity achieved by millennia of blood and war.

About six months ago, I wrote a somewhat optimistic assessment of the pain and politics disrupting countries within the Union and the downstream effect on their economies (https://gerberkawasaki.com/article/what-is-going-on-in-europe). My thinking was that, regardless of how complicated and strained relations can be, Europe is still a civilized union were common sense, shared purpose and reconciliation ultimately prevail.

After witnessing an unimaginable year of endless infighting, absurdity, and truly astonishing developments, well, my opinion has shifted considerably. In fact, this past year has very much felt like a season of Game of Thrones minus is taking place in real time within all corners of Europe.

Let’s take another tour around the continent and look at what’s happened this past year:

United Kingdom
The ultimate conundrum that is Brexit. England, the island empire that conquered many continents centuries ago and helped build the modern world order fueled by trade and commerce is currently in the grips of the most asinine of situations. The Brexit saga has gone from a badly thought out referendum to a real political circus with few good outcomes if any. The British political diaspora once regarded as leaders in business and democracy are relegated to be the laughing stock of the world. With yet one more last-minute push of the Brexit deadline till October 31st, perhaps because the uncertainty has not been spooky enough, the British economy has been in a de facto stand still. Financial institutions are leaving London for Paris and Frankfurt in droves, Japanese and other conglomerates are scrapping expansion plans and most businesses are wondering what this all means! To add insult to injury, this new delay means Britain will have to participate in the parliamentary European elections coming up in May 23rd.

France
Seemingly an economic beneficiary from the Brexit chaos, France is drowning in its own agony. The yellow vests (gilets Jaunes) manifestations have been going on for months now. Thousands of mostly blue-collar & disenfranchised citizens have taken to the streets to protest low wages and government attempts at reforming taxes, employment laws, and the broader economy. This is a much-needed initiative to make the country more competitive on a global scale. While the ideas are sound, President Macron failure to get buy-in from different factions of the political spectrum for his vision of a more open and competitive France has backfired. The plan is failing miserably with the protests turning violent and torching some of Paris’ most storied landmarks. Macron’s government is at 20% approval rating and very few of the reforms are being implemented. What was a climate of hope after the election of a young reformist president for a new France has turned into constant conflict? The economy has continued to lag, unemployment remains stubborn and investment opportunities are scarce.

Germany hile still filling the role of the stable big brother, Europe's largest economy is also showing signs of weakness. Its once unstoppable industrial might is struggling to keep up with increasing competition from many rising Asian countries putting pressure on German output and the European economy as a whole. Some of the largest German car manufacturers and banks are drawn into incredibly embarrassing and serious scandals such as the emissions cheating scandal and bank fraud at the once mighty Deutsche bank. Politically, Chancellor Merkel which is has been a steady fixture in world politics for the last 20 years has lost the confidence of her own party and succumbed to the consequences of her disastrous immigration policy forcing her to step down next year - These same policies are causing the rise of a far-right fascist movement, something unthinkable considering Germany’s past.

Italy
After the win of the extreme right 5Star and the populist party- The League, and their rule for over a year now, Italian politics have become even more convoluted than they ever been since WWII, constantly on a collision course with other EU members, disregarding EU rules, directives and resolutions while forging alliances with traditional foes. The Italians are more divided than they ever been, and their nationalist policies have thrown Italy into a recession further driving division, discontent and deteriorating both fiscal and financial position of the country and its citizen. Mamma Mia!

Southern Europe
The other countries identified by the ugly acronym PIGS (Portugal, Italy, Greece & Spain) have also been gripped by the same nationalist and populist movements propagating around the world. The Catalans in Southern Spain have seen a revival of their separatist movements from the 80s and 90s pushing for independence from the country. Although unsuccessful, the year was marked with protest and political conflict. After elections last week, Spain emerged more fragmented with the socialists holding a slim majority. It remains to be seen if the politics will get better or continue their collision course with Europe. Spain however, has seen its economy pick up relative to other EU member countries which have created a more prosperous environment for investment. The same environment is also seen in Portugal which has been relatively quiet politically and has been an attractive destination for retirees from all over the continent investing in Real estate and boosting the overall economy.
Greece is no longer overshadowing all the headlines with its protests and dire conditions as it crosses the 10-year mark since its financial crisis. The economy is still a long way from a full recovery and the country is dealing with the highest unemployment in Europe and slow if any growth. Hard to predict how things will work out but at least the political infighting seems to have moderated and tourism is picking up again. The Greeks have always been resilient and still see that being part of Europe is much better than the alternatives.

Eastern Europe
The birthplace of new democracies leaving the grip of communism, countries like Hungary & Poland are seeing a resurgence of nationalism, authoritarian rule, and an anti-Europe sentiment. Hope is turning into resentment as the grand promises of riches and successful western integration after joining the EU are overshadowed by the realities of economic subordination and dependence.

To make matters more complicated, the EU parliamentary elections take place on May 23rd. To be sure, the balance of power between the Parliament’s party groups will depend on how voters cast their ballots in the 28 member countries. Polls show the overall election outcome is likely to yield the most fragmented Parliament in modern EU history, creating genuine suspense about the precise shape of a majority coalition and casting a real shadow on the feasibility and cohesion of the European Union.

When looking at how all these dynamics are playing out, I’m truly hard pressed to find the positive undercurrent that will push the EU back to its intended purpose and help its younger economies prosper while it continues to seek growth within large members. With the UK in limbo, the uncertainty is further driving uncertainty and confusion. On the global political arena, despite a strong willingness from the various leaders, Europe is unable to take a leadership position in the world and champion the Western democratic values as well as global trade and commerce just as the US retreats and deals with its own nationalistic demons. As a result, opportunities to invest exist but without seeing some of these events resolve themselves and a bit more cohesion in their politics, it is increasingly harder to see investors willing to continue betting and committing there.

Just maybe, a King of the North and the mother of dragons will emerge and help bring all the European houses together and alleviate all the chaos. If only real life was a TV show.

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Hatem Dhiab is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $840 million in assets under management as of 3/31/19. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures the success or protects against loss. Readers shouldn’t buy any investment without doing their own research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results.”