CONTRIBUTORS
Michael Browne
Investment Strategist,
Franklin Templeton Institute
Preview
Today, Europe has to contend with rising external threats, uncertain US support and a stagnant economy. Faced with lower living standards, populations are growing restive—resulting in swings to political extremes. But if the continent can take the necessary steps to escape its malaise, it could be poised for a powerful revival.
Economic discontent is already manifesting at the ballot box. In recent elections, right-wing populists have made gains in almost every jurisdiction. But even as the populist right has risen, it has been excluded from government across Europe. This means that increasing parts of the population are excluded and unrepresented. That creates an impasse, which reinforces the appeal of the populist message and leaves Europe stuck with no growth and no ability to react to events.
But it doesn’t have to be this way. To start growing again, Europe needs to front up to five issues, which we discuss in this paper.
Deregulation: The first is deregulation, dismantling the complex regulatory frameworks that can choke off innovation. Too often, we in Europe see anything new as a threat to be regulated rather than an opportunity.
Innovation: Beyond regulation, Europe’s capacity for innovation is constrained by its complex patent system and the way in which its research universities handle breakthroughs. In the United States, patents are generally more widely applicable and more easily defended, which provides considerable incentives for innovators. By contrast, Europe’s narrower focus offers lesser prospects of reward.
Energy: The third piece of the puzzle is energy. Here, the questions here involve supply, security, cost, Russia and the green agenda. Installation of renewable supply has been sluggish, and there’s an urgent need for an acceleration of the process to allow the continent to benefit from natural resources such as wind.
Defence: Europe’s lack of spending on defence has been a talking point since the first Trump administration; in Trump’s second term, it has become a critical issue as the United States suspends its military support for Ukraine. Encouragingly, Europe now appears poised to take action, with the European Commission’s ReArm/Readiness 2030 plan and Germany’s game-changing defence proposals.
Demographics and productivity: Population and productivity trends are closely linked. Europe’s workforce is set to shrink by 2 million people a year from 2040.1 So the continent needs to either import more people or close the gap through increased productivity. Immigration is politically fraught, however; it’s a solution for a growing economy rather than a stagnant one. One way in which Europe can boost productivity is by cutting taxes on entrepreneurs and investment returns.
The opportunity
The need for wide-ranging reform in Europe is undeniable; the degree to which this need will be answered with real action is less certain. But if Europe meets its historic challenges with the capacity for innovation that it has shown in the past, it will create investment opportunities across a broad swathe of sectors. Investors should be alert to the prospect of a new renaissance—and poised to profit if it comes to pass.
EndNotes
- Source: European Commission as at 9 September 2024. The Draghi report on EU competitiveness.
WHAT ARE THE RISKS?
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Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Hong Kong and Taiwan could be adversely affected by its political and economic relationship with China.
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