Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
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Today's number 116. That's the percentage increase in egg interceptions by customs at the U.S.-Mexico border in the first two months of this year. Ed Shustory. I was at a farm and I hurt my ass. I didn't know whether to see the proctologist or a vet. ♪

Get it? Because I was having sex with an animal? I didn't put the bestiality in there. I should have gone simpler. I have a dildo farm. Unfortunately, it was taken over by squatters.

Jesus Christ, you're literally low IQ with my porn jokes. Well, Claire's laughing, so yeah, clearly I don't get it. That's because her prefrontal cortex, which is executive function and management ability and ability to interpret profanity, are 18 months ahead of yours. It'll catch up soon, though. I still can't put it together. Take me through it for the low IQ brain. No, no, no, no, no, no, no.

No one needs to hear a guy my age explaining squatting and dildos. Oh, got it. Oh, you got it. There you go, little soldier. You'll get there. Very slow this morning, clearly. How are you doing? I'm doing well. I'm excited about it. I'm taking my son on his college tour on Saturday. I'm excited about that.

What I call the places he won't get in. Where are you going? Can you share? We're going to Wisconsin. We're going to Illinois. We're going to Michigan. We're going to Virginia. We're going to Massachusetts, New York, North Carolina. Wow. There's very few things he listens to me about, and one of them is college. And I've said, just you got to trust me on this. You want the kind of, in my view—

the big college, fall leaves, football games, fraternity sororities experience. I just think it's incredibly singular and unique. Does he agree? Yeah, he's kind of a mini-me, angry, depressed. No, he really is sort of, we're very similar. And I feel as if I know him, and he's pretty social and smart and all that good stuff. So

I think he would benefit from kind of a big land grant. Am I just trying to live? Have I become like Serena Williams' dad? Am I just living my life with my son right now? No. You are going to Michigan because I couldn't. Because I couldn't. Yeah, exactly. You're going to join a frat. That's right. One thing I will say is that when I did the whole college tour with my mom—

You don't really learn that much, is what I found about the schools, because you're just being inundated with all of this information, and they all look great. But it was a great bonding experience to do that with my mom. I think that was my biggest takeaway. It's just a nice time. That's nice. That's what I'm looking for. Should we bust into the headlines here? We should. Thank you for that, Ed. Well done. You're welcome. It's time to fly.

I hope you have plenty of the wherewithal. Apple is reportedly losing $1 billion annually on streaming. Apple TV Plus is the company's only unprofitable subscription in its very fast-growing services unit. Silver Lake is taking Endeavor private in a $25 billion deal. The newly formed entity will be called WME Group.

With former Endeavor CEO Ari Emanuel serving as the executive chairman, Emanuel secured a nearly $174 million payout as part of the deal. And finally, Nike stock tumbled to a five-year low after the company projected a larger than anticipated revenue decline for the current quarter.

Nike attributed the lower guidance to ongoing challenges, including tariffs and declining consumer confidence. Scott, let's start with your thoughts. Apple TV Plus is reportedly losing $1 billion annually on streaming. What's interesting is to think if they could do it all over, would they still be in this business?

And they got into the content business when everyone, I feel as if Apple decides, okay, we need a call option. We needed a call option on the headsets. When meta was getting into them, we need a call option and content. And I think that when you look at decisions, you have to look at it the way the military looks at it. And that is when they're reviewing an officer's decisions on the battlefield, they don't look at the outcomes. They look at given what he or she knew at that moment, was it the right decision? Yeah.

And I think that figuring out quality content that maybe motivates people to continue to buy an iPhone over a Galaxy, you could see how they would justify it. And also, they have the capital to kind of go mostly toe-to-toe. And even they can't go toe-to-toe. I think they spend $4 or $5 billion a year on content, and Netflix is at $18. But at this point, I can't imagine their business plan said that whatever it was, they

When did they launch it? 2019. I imagine the business plan didn't say in six years we'll still be losing a billion dollars. This is a different thing because Apple, a billion dollars is a lot of money for most people. It's not for Apple. It reported $94 billion in net income in its last fiscal year. And at average revenue of $800 per iPhone, Apple would need to sell one and a quarter million iPhones every year. So the question, the analysis they've done, I imagine, is...

Does this probably inspire another one and a quarter million people a year of their installed base? They sell 232 million iPhones globally in 2023. So can we get another half a percent, either upgrade and not switch to Android or get an incremental half a percent because of the Apple TV offering? Now, I don't think it's because you get...

When I bought my iPhone, I think I got a free year of Apple TV+. I don't know if that even registers with people who are buying an iPhone. What I do think, though, is that what they have done a really good job of is they kind of took an HBO Plus approach to their content. And that is shows like Greyhound, Ted Lasso, and now Severance. And then The Morning Show are of such incredible production quality.

that it feels very Apple-esque. I think their content is very on-brand.

The question is, they went into a field that is too crowded, but for a billion dollars, is the marketing halo of that amazing content almost like a marketing expense? What do you think? Yeah, I think that's the main point here. It actually goes back to what we were talking about with Southwest and their bag policy and Costco with their hot dogs, the idea that this is intentionally a loss leader. They're losing a billion dollars a year.

And perhaps that's worth it to them because they say, well, maybe this is going to get people to buy iPhones. We're going to offer three months of free Apple TV Plus if you buy an iPhone or if you buy an iPad or if you buy a Mac laptop. And I think that is the question is how many people are actually buying Apple products because they want to get three months free?

of free Apple TV+. I would argue zero people are buying these devices for that. And I would also add on to the fact that you have

iPhone sales, which are flatlining at the moment. I mean, we have seen an increase in laptop sales, but I really doubt that this $1 billion year loss is paying off. And then you just look at the numbers of the platform itself, averaging around $5 billion a year on content since they launched this in 2019, but they only have 45 million subscribers.

And you compare that to say Max, for example, which has 117 million subscribers and Netflix, which has more than 300 million subscribers.

So it's not a very good business. And I just doubt that the upside that you're seeing in the sales of their other devices, I'm not sure that you could justify this as a worthy loss leader in the Apple business. And I think what we will probably start to see is Tim Cook getting under a little bit more pressure.

from shareholders about these issues. And I think we'll start to see that that content budget will shrink and shrink and shrink. Let's move on to Endeavor.

and this acquisition by private equity firm Silver Lake. Just a reminder, what is Endeavor? A lot of people know this company as WME, which is, of course, the talent agency that was founded by Ari Emanuel. You might know who that is. He was the guy who inspired the TV show Entourage. He's sort of the star talent agent in Hollywood. And WME, they represent all of the biggest movie stars, all of the biggest pop stars. They also, by the way, represent Scott Galloway. But

But they also have these other businesses too. So, for example, they own a controlling stake in the WWE, the Worldwide Wrestling Entertainment Company. They also have a controlling stake in the UFC. So now Silver Lake is taking it private. It's been a public company since 2021. They're going to rename it the WME Group. And I think this is to reflect this new focus back onto talent and talent representation, right?

They're paying a 55% premium, so $25 billion. That is 55% higher than its market cap before the bid. And it's also the largest take private deal in entertainment history. So, Scott, your reactions to this deal? And maybe, do you have any inside baseball, given the fact that you work semi-closely with WME? I don't on this side of it. I really like the folks at WME. I don't know Ari. I don't think I've ever met him. And...

Patrick Whitesell, I have met a couple times. He's got a central casting for what an agent should be. He's this tall, handsome guy who's very good at making you feel important. Every time I've seen him, he comes up and he says, you know, big fan and super nice, super likable, like total kind of baller, impressive guy. Ari is an icon in the industry, very smart. And...

Just so I can get fired by my agency, my general sense is this is financial engineering, so to the top two or three guys can rape the company and its shareholders. They're part of the virus that infects American management, where they see the company as a vehicle for them to vastly overpay themselves and to underpay people at the low end. The stock basically has underperformed the market. My guess is when it went public, he and Patrick got an enormous payday.

And a meanwhile entry-level assistant pay at WME was raised from $15 to $18 an hour in 2020. Well, that was big of them. Roughly $37,000 a year and has not increased since. So I think this is a conspiracy between Silver Lake and the senior management to basically fuck shareholders and take advantage of a marketplace where a lot of people want to be in the great big business of Hollywood.

And I think it's insane that a company like this would pay anyone in the organization 15 or 18 bucks an hour. So does this make sense? I don't know. What's the rationale? Why did this make sense to go public?

just a few years ago? And then why does it make sense to go private now, if not just to make the people in charge and some of the board members really fucking rich? I think you are probably on the money here. I mean, he's getting $174 million in cash for the shares that he owns in this transaction. But I think probably the more important statistic here is that last year, for his compensation package, he got paid $84 million. And that's just...

so stark in comparison to, as you say, the extremely low pay for the entry-level workers in this business. I mean, I know people who work at these companies and the life as a staffer and assistant at one of these big talent agencies is not very good. It's one of those glamorous industries where I think they get to take advantage of the fact that people really want to work in Hollywood, but these people do not get paid very well.

And then you have the fact that the company, after going public, has done very badly from a shareholder perspective. I mean, Silverlake would say that the common stockholders here did very well here. They got $27.50 per share, which is a 55% premium to the share price that was unaffected by the bid. That's pretty good. But what you have to remember, though,

is the IPO price, the issuance price. This company went public at $24 a share. So even if you were the very first investor, if you invested directly in the IPO, you have made a lousy return. It's around 14% in the last four years. The S&P in the same amount of time is up 40%. And so, yeah, this is a bad investment. And for a long time, it was even worse. I

So I think you're probably onto something here. But I think the more interesting thing will be seeing what your agents over at WME will say after this episode releases. I love what Sam Harris said. And that is, if you have economic security and people who love you, you have an obligation to speak the truth. And I love the people at WME. By the way, I don't even think it's just the junior people getting fucked here. I mean, the thing about tech, for all the shit we give tech,

When they do really well, they generally share those spoils. So I would love to know, and I think a reasonable question is, if an assistant has been there, any employee been there longer than a year, are they making any money? Are they getting anything from this? And what I think, I'm not sure, but what I would imagine is that even mid-level and even senior agents there, they're not really participating in this payday. There needs to be a different zeitgeist in corporate America, where if you're blessed like these guys are,

You share the wealth specifically with the lowest people. And let me, I never want to pass up a chance to virtue signal, but we've been talking at Profiting Media, you know, we're small, we're 18 people, but we make a really good living.

And we do really well. We're blessed. We're very good at what we do, but we're sort of in the right place at the right time, media podcasting. We're drafting off of the monstrous talent of an aging professor. But the result is we have an exceptionally high margin, profitable little business. And so we've been talking about, and I think we're going to do this,

We're going to what we call a maximum wage business, and that is we're going to have minimum wage of $50 an hour for everybody who works with us on a contract basis or part-time or is paid hourly. And we're going to have a minimum annual compensation, including bonus, of $100,000 a year. And why are we going to do this? Because we can.

And we make really good money. And I make a shit ton of money. And if I make a shit ton of money minus a half a million dollars a year, that's okay. But what's going to happen to the second Ferrari? Are you going to compromise? Yeah, the thing about for me getting a Ferrari is that my dick is too big. But anyways, if you're a company like WME or on a much, much smaller scale, Profiting Media, Ari, you don't need a second billion. It's not going to make you any fucking happier, boss.

You know what's going to make you happier is helping people move out of their car if they make a bad decision. You know, my question to the senior manager at WME is, given your blessings and your strength and your skills, are you protecting and providing for your professional family? I mean, are you really protecting them? Are you really providing for them? And the senior level people will be fine, but it's the people at the lower end or the people in the engine room who you probably don't have a lot of contact with who

Are you really acting like a man? Is that what it means to be a man, to extract enormous economic benefit without protecting and providing for the people who are not as fortunate or don't have face time with you? Anyways, I'm all riled up about this. And if anyone wants to turn this into an original series, call my agent at CAA.

Love you guys. But my agents are nice. If my agents weren't in charge, they wouldn't put up with this shit. I just want to make it very clear. I'm not calling for an attack on Ari Emanuel. I've heard that this guy is an absolute bruiser attack dog. He can take anyone down. So I just want to make it publicly clear on the podcast. I have no beef with Ari Emanuel. It's only Scott who wants to pick a fight.

Something about billionaires that don't pay their people kind of chafes me. But anyways, I don't know the guy. I don't know the guy. He's obviously very successful, brilliant agent. But what's the point? What's the point of all the success? Anyways.

Thank you for my virtue signaling moment. Let's talk about Nike, which has hit a five-year low as of its last earnings call. The market cap is now below $100 billion. Just to put that in context, that means that Nike is now almost three times less valuable than Hermes. And I use that example because just a few years ago, the opposite was true. Nike was almost three times more valuable. So this is a stunning drop, much of it a result of these tariffs.

also the business at large. Scott, your reactions to Nike, their earnings, and the fact that the stock has plummeted five-year-large. This is an amazing brand, amazing human capital. I imagine they have incredible retailer relationships around the world. It's a global brand. It's still arguably, I would imagine, one of the 20 best brands. I don't know. This feels like an activist to me because it feels like someone's going to show up with $1 billion to $3 billion in stock and say, we're here. We're going to give Elliot, the new CEO, a chance to

to do his thing for a year, but if it doesn't work, we want to see pretty serious cost cutting. So, but I like the company. I would consider actually investing here. Yeah, I mean, I think just to look at the earnings, I mean, the stock, it was a massive stock drop. It was around 7 or 8% in a day.

It's interesting because the actual results from the previous quarter were not that bad. They beat on revenue. They beat on EPS. The big problem for Wall Street and for investors was the guidance. And this is important because you might remember...

Back when they switched the CEO, they brought in this new guy, Elliot Hill. Nike decided and they publicly announced that they were going to pause their reporting on guidance. And that was sort of a big deal that we talked about on this podcast. So they didn't report the guidance number in the 10Q itself, but they did talk about it on the call. And this is the part that really freaked out the market because they said that in the coming quarter...

They expect that the year-on-year revenue, the sales number, will decline in, quote, the mid-teens range. So they're looking at a 14%, 15%, 16% drop on the top line. And that's both already very bad and way, way more dramatic than expected. And I think the question that people are asking, well, why is this happening? And the answer is what you'd expect. This is because of the tariffs. Because...

Out of the hundreds of suppliers and manufacturers that Nike works with, guess what? A quarter of them are in China. So they have these two choices now. You can either take the hit on the margin, which is going to upset people, specifically investors, or you can raise your prices, which is going to upset consumers who are already not very happy with the product assortment at the moment. And they didn't say which strategy they're going to go with. I think we could maybe expect both. Maybe they'll

raise prices slightly and also take a slight hit on the margin. I think what we can definitely expect, though, because they told us, is a significant decline in revenue. So there's a few things that are optimistic and pessimistic. The first is, just on a brand level, when you get to the level of ubiquity of Nike and you're basing it on

high margin, which is Latin for being more attractive to mates or self-expressive benefit or making people feel closer to God. It's very hard to maintain that margin and brand power because the moment your mom shows up with Nikes, you're no longer interested in wearing Nikes as the 19-year-old kid. And basically, most of fashion is dictated by a young aspirational male or female. And so generally speaking, these companies that are really brand-driven,

They have trouble getting above, say, $5, $7, $10 billion. And Nike was able to do it. Fiscal year 2024, it got to $50 billion. But at some point, if everyone was wearing Van Cleef, you would find that other competitors would come in. People look at this as self-expressive benefit. And once every kid in high school is wearing Nikes...

Kids go, I don't want Nike. I want to express my differentiation. And what Hermes has done is they've said, okay, it's not about volume. It's about scarcity, the illusion of scarcity. I remember I was buying a Kelly bag for someone in my life, and they acted it as if it was an act of God to get me this fucking bag.

I'm like, okay, it's such manufactured scarcity. These are not difficult items to manufacture, but they're really smart because they know if these things become in any way, I don't even become, I won't even say they won't even become ubiquitous, but become even ever-present or common, they're done. They can't charge anything.

you know, $18,000 for a bag that probably costs $1,200 to produce. It is difficult for a company like Nike to maintain the growth expectations the street wants from them while maintaining that sense of aspiration and exclusivity. So that's the bad news.

The things they have for them or that Elliot has going for them is, one, he has cloud cover to do the very ugly and hard work of cutting costs like a madman right now. He can pretty much do whatever he wants. He's brand new. The board is going to give him at least two or three years to try and do his thing, probably longer. He has cloud cover to cut costs. He's probably going to have to reconfigure the approach to marketing because he's

If you think about what's changed, their core competence was they were smart enough to get very tightly integrated with, I think it was Whedon Kennedy, and you could smell a Nike commercial coming on. Like in the first second, you're like, oh my God, this is a Nike commercial, pay attention. And the primary weapon of branding, and that is great commercials and broadcast television, that weapon has become duller and duller and duller. And that is broadcast television is just no longer available.

as effective because the most aspirational people who Nike wants wearing their shoes probably aren't watching a lot of commercials on broadcast television now.

So they have had to kind of reinvent. Now, have they been as good around influencer marketing, around supply chain? I don't know. But it's got to be heartbreaking for a lot of the people at Nike who have worked really hard, really good, very talented people, and they've made no money in terms of their equity value over the last 10 years, right? If you started there 10 years ago, you haven't made it, you know, unless maybe it's RSU, it's not options. But I would, again, I see more risk to the upside

And that is, I would feel fairly confident betting that the stock doubles from here in the next two to three years versus getting cut in half because the brand value is just so powerful. Anyways, Nike, just do it. We'll be right back after the break for our conversation with Karsten Brzeski. If you're enjoying the show so far, be sure to give Property Market to Follow wherever you get your podcasts.

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welcome back here's our conversation with carsten brzeski global head of macro research and chief eurozone economist for ing as well as chief economist for ing germany so carsten we're happy to have you on today to talk about germany which we've been discussing a lot recently last week scott and i discussed this new defense spending package we've also talked about the german stock market and we'll get to all of that

But first, I would just like to get a general picture of what's happening in Germany. And I think a good place to start would be politics. Germany held an election last month. The Conservative Party won, but not by much. Tell us what happened in the German election. Give us the state of play in Germany, the political situation, and what has happened since that election. It was a very, very important election.

As you know, we had a collapsed government before. That was the first time we actually had a three-party coalition in Germany. First time ever. Didn't make it till the end. So with these new elections and snap elections end of February...

It was more or less the idea that this would be the last election, the last chance for the established political parties to show that they can really get the economy out of the current slump.

before maybe extreme parties to both the right and left wing of the political landscape would gain even more votes. When you look at the results then, what did we get? Yes, we had a winner. That was the Christian Democrat Party led by Friedrich Merz, but they hardly got 30% of the votes. I think the big surprise, no longer a surprise for Germans, but for international observers, was the second place.

for the Alternative for Deutschland, far-right extreme party coming in with more than 20% of the votes. And then we had the Social Democrats, the Greens, both in the former government party, they lost. The Liberals didn't even make it into parliament.

And now we have a new parliament actually since this week, since 25th of March, in which we do have kind of the right-wing AFD probably being the largest opposition party. And we have also the left-wing extreme, the left party, former Communist Party also being in parliament. So it is not as fragmented.

as other European parliaments are, but German politics has become more fragmented. Yeah, we hear a lot about the AFD party here in America. Obviously, Elon has expressed support for this party. It's the far right party

party in Germany. And then you mentioned the rise of the extreme far left party in Germany. Your thoughts on what this says about the situation in Germany right now? I think at the election, there were three elements that were key. One is the economy. The German economy hadn't grown for five years in a row.

We had the headlines that also big industrial companies in Germany had to lay off people. So it really, you know, I think also all voters understood that there is something structurally at hand in the German economy. So that clearly played a role. People were looking for answers. That is one. Then we have the migration story, where also then over the winter period, we had more attacks by...

Well, migrants, former refugees, so really how to integrate migrants into society has also been a big topic for these elections and clearly explained why the AFD gained so much support. And then the third point is more kind of general topics.

disappointment with established parties. This idea, the voters thinking, we had given them many chances to show that they are able to manage migration, that they are able to manage the economy. In the eyes of many voters, then established parties had not succeeded. So why don't we give other parties a chance?

So I think this is clearly stepping away from more centrist parties, established parties, clearly another reason why we had the support for both. And that's interesting, for both the AFD and the left extreme party. You mentioned there's five years of stagnation in Germany, and of course last year,

It happened again. The German economy shrank. I think GDP fell around 0.2%. Big picture, what has been going wrong in Germany? When you look at the economy, how it's performed compared to America in the past few years, what are the main issues that are causing that stagnation? I always call them cyclical and structural issues. Cyclical issues are

pandemic, even more war in Ukraine, energy crisis. So that clearly pushed down on industry, but also on economic activity in general. Don't forget that Germany had been highly depending on Russian oil and gas before that. So the energy price crisis was a big factor. Also geopolitical tensions for an economy that is so depending on exports. But that's not all.

I always love to look at these international competitiveness rankings. And there, Germany was in the top five 10 years ago, one of the most competitive economies in the world. Now, 10 years later, Germany is somewhere between number 20 or ranked 20 and 25.

And what does this show? This shows underinvestment, underinvestment in infrastructure, in digitalization, in education. So Germany has more or less forgotten to really innovate, to invest in the future. And this is what now all these things came together. Another important factor, but also only showing it is innovation.

the changing role of China over the last couple of years. And I think electric vehicles is the best example, but there's more to it. That China is now able to produce the stuff that normally imported from Germany. So China has moved from being a very great, flourishing export market for the German industry to a rival. And then the German industry has not been able to face this competition.

So, as Germany goes, kind of so goes Europe. Largest economy, about 4.6 or 4.7 trillion. I think the next biggest is the UK at about three and a half. If the US can't be counted on in terms of resources for Ukraine, then EU gets to make a decision around how supportive or not supportive they are of Ukraine. And

That's largely, I think, going to be dictated not entirely, but substantively by Germany's approach or view on how supportive or not supportive they want to be of Ukraine. Could you attempt to distill for us the general feeling about the war in Ukraine and how resolute or how firmly behind Ukraine, Germany is or isn't?

Given the fact that Europe's now, I mean, I hate to say this, but more on their own than before in terms of support or lack thereof of Ukraine. The German people clearly stood behind Ukraine and stood behind support for Ukraine. Yeah.

But don't forget that Germany was a split country with different cultural backgrounds, also with different historical backgrounds vis-à-vis Russia. But this war in Ukraine is only a few hundred kilometers away from Germany. So this is pretty close by. And you had an interesting combination of still...

of fear from Russia, fear that the whole thing could escalate. I think Germany was not alone in 2022, which I think also made that the German government back then was also maybe too cautious and giving big support for Ukraine because there was always this fear of any nuclear or technical nuclear reaction by Russia.

But the general feeling, Scott, is that really the Germans stand behind support for Ukraine. And if you now really look at what happened over the last couple of weeks, I think that is even more important than what happened in 2022, 23 and 24, is that Germany and also the German people understood that.

that the role of the US has completely changed. And this is, well, me not being the economist, but just an ordinary person. I'm born in West Berlin. I'm actually born in the US sector. And I grew up always with a strong belief in...

The US would support us if push came to chef. And that is not only me personally, but I think that is something that an entire generation has or has had. And now the problem is, I think many in Germany understand, we can no longer count on this US support, on the US being the last resort.

So, which now, and this is also why we had this big historic fiscal package. And it is not even the new government, because technically speaking, we don't have a new government. We have possibly an incoming government, but we don't have an officially new government. So, and that is the interesting thing. So, we now had that the probably incoming government, with the probably incoming next chancellor, Friedrich Merz,

decided to go for a historic fiscal U-turn, not only on spending more for infrastructure, but to really go for whatever it takes on defense. And I think this is where you're heading to. I think Germany has now understood, and I think most of Europe has understood that Europe needs to step up its game. Yeah, just on the spending package, Carsten,

You know, it sounds like this is a turning point in terms of Germany's approach to spending in general, both spending on defense and then also spending on infrastructure, which compared to its peers has historically been very low. But then there's also the debt side, where Germany has had this

basically allergic reaction towards debt and towards borrowing for as, I mean, certainly the past many decades. You know, lowest debt to GDP in the G7, one of the lowest borrowing rates

Two questions. One, why do you think Germany has had this approach to borrowing in the past? And two, do you think this is a turning point in terms of debt too? Do you think that we're about to see a country that embraces more fiscal liberalism, I guess I would say, and embraces debt in the same way that perhaps America does?

linguistic journey for you guys. In German, debt means the same as guilt. Oh, wow. And I think that is not the only language. But that is an important one. So somehow debt, like government debt, always had a negative connotation. This explains something. Because the funny thing, when you really go back, I think until the late 1960s,

Germany had also been in a kind of, well, this was mainly a fiscal policy framework which allowed deficits only for investments. We'll call this one of the first golden rules on fiscal policies. Then with the oil crisis and inflation in the 70s, all things changed and we saw this surge in government debt across the entire G7.

Then came the financial crisis. Well, I'll do fast forward. Financial crisis 2008, 2009. Germany also had to bail out some smaller banks, but with lots of taxpayers' money.

And this was the moment when the government back then said, hey, we need to make sure that politicians will not be irresponsibly spending taxpayers' money. So let's go for this constitutional fiscal debt break.

Back then, it made sense to tie politicians' hands. Then we had the Euro crisis. And in the Euro crisis, 2010, 2012, well, this entire debt break came in handy. Why? Because Germany could lead by example. So Germany was clearly the fiscally frugal country, which could tell the southern European economies to also do austerity.

All good. Then I think this is then when the mistakes started to come in because in the 2010s, after the Euro crisis, Germany was still going on with its fiscal debt break and the fiscal debt break became a political issue because the political issue was this is something, one of the very few economic promises or governments led by Angela Merkel

were able to fulfill, and this was very interesting or very easy to understand for voters, this was like a normal person cannot spend more money than it earns. So therefore, why should the government spend more money than it earns? What did not get so much attention in the last decade was the fact that, yes,

Germany ran fiscal balance budgets, sometimes surpluses, but it was always because Germany was applying austerity on investments. The government continued to consume and to spend, give out nice electoral gifts, but they forgot to invest. And now, right now, I think we have their research institutions saying that we have an investment gap

in Germany of some 600 billion euro. And this is explaining also this loss in international competitiveness. It's an investment gap mainly in infrastructure, but then infrastructure, conventional and digital infrastructure. And now the interesting thing is it clearly is a political issue.

and it also was one of the big topics during the election campaign. Do you want to change the fiscal debt break or don't you want to change the fiscal debt break? Very easy. And now, and that was also the interesting thing because the CDU, Christian Democrats, Friedrich Merz, they always said during the election campaign, no, we're not going to change anything. We're going to stick to the debt break. Well, he made this U-turn.

This is a very important U-turn. And what we're having right now, I think that's also important also for your listeners and viewers here. So what is it that we got in this historic decision? We now have a fiscal package of 500 billion euro to be spent on infrastructure. There are some details of these 500 billion euro, 100 billion euro go into a climate transition fund fund.

billion euro go to the regional state governments but also to be used for infrastructure investments and then €300

billion euro remain at the federal government for infrastructure investment. So that is one big package. Also means to be spent over the next 10 to 12 years would make up like 1% of GDP every single year. Then we have the other thing, smaller detail but not completely unimportant. The regional states

get more fiscal space. So a bit like what you guys have in the US. Until now, the state governments had a balanced budget amendment. So they were not allowed to run any single deficit. So now they get a bit more fiscal space, also increasing spending power. And the third point then is clearly defense. And then with the defense story, also a technical issue. So what the technicality says is that

all defense spending in excess of 1% of GDP will be exempted from the debt break. So simply meaning that Germany could run extreme high annual deficits. Stay with us.

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Is all of that optimism in Europe, is this all downstream of this U-turn, as you put it, in fiscal spending? Is that what's inspiring this massive surge that is clearly unique to Europe? It's not happening in America. What is that optimism all about?

it nicely coincided with this entire debate on Trump session, Trump slump in the US. So you clearly see that investors got afraid about what's happening in the US. So let's move out of the US. Where can we go to? Then at the same time, we had this big, well, and that is historic, U-turn in German fiscal policy. But we also had at least the announcements that Europe was

as a whole will spend more on defense. So clearly, clearly positive. We also know the good old saying that Europe very often over promises and under delivers. But I think that's also important. Most of these things are relative. So compared to where we were in January, for example, where we were in dynamic growth in Europe,

a long-lasting structural stagnation in Germany and very little positive prospects for this year and even the year after, plus the looming tariff threat. I think this is the starting point of Europe this year. If you look at the current situation, what has changed? The delta is clearly positive. The delta is German fiscal policy, EU willing to do more on defense, and at least Europe

While we speak, we don't have the tariffs yet. Well, come April 2nd, different story. But so therefore, relatively speaking...

the European outlook has improved. I'm always, I love Europe, but I'm always warned against too much Europhoria. So let's also be clear, because it first really needs to be implemented. But from where we were coming from, the outlook has clearly improved.

Each year, Carson, we make a series of predictions. And one of our kind of our big markets prediction at the end of 24 was that for the first time in a long time, the rivers of capital would reverse flow out of everything that seemed globally flowing into U.S. growth and back out to international markets. And we specifically called out European value. And right now that it's better to be lucky than good. It appears that is happening.

And we've seen a massive uptick in capital inflows to the European market. Do you think this is a kind of a blip? Or do you think that Europe has new life and potentially this is the beginning of a multi-year trend? It's more than a blip. It's somewhere in the middle. I'm still cautious enough to say this is not necessarily the start of a multi-year rally.

Let's also be clear. But it's more than a blip because I really think we will get more fiscal stimulus. Which factors, which drivers will now decide on whether this could be a multi-year rally or whether it is more short-lived? This is whether Europe, and I'm now looking again at my home country, Germany, will really be able to also implement structural reforms.

i think what i was saying is that you know spending more money is a good thing yeah it at the current juncture it is um it is a necessity when it comes to defense i don't expect too much economic growth coming out of these defense spendings at least not this year and next year so this is a slow burner for europe because europe first needs to build up production facilities on on military equipment

But infrastructure spending is traditionally positive. But to be very blunt, does 500 billion euro infrastructure spending in Germany now make that the German automotive industry will become more competitive again vis-a-vis China? No, not automatically. And this is why there is more needed than only fiscal spending.

And if we get this, what is more needed? And that is topics you all know. This is a bit like in the U.S., reduce bureaucracy, reduce regulation, but also invest in education. Also really decide and investigate which sectors are

are actually sources of growth over the next couple of years. In which sectors will Europe be able to compete with China, but also with the US? And I think this discussion has not really gained momentum yet in Europe. If it does, then I would become more optimistic and could even see a longer period of higher growth in Europe. But I'm not overly optimistic yet.

There's always a question as an American living in Europe that how come Europe hasn't been able to establish very many tech unicorns? If you look at the number of unicorns that have come on the scene, the proportion of them is actually still fixed in the U.S. It appears that the rise of China has come at the expense of Europe. And there's a lot of questions about culture. My thesis has always been in Germany because they do a pretty good job of creating on-ramps for

quite frankly, for young men into a decent middle-class life, even without a college degree, that the downside isn't as great, so people aren't as risk-aggressive. What do you see happening in the German tech sector? And I've met the CEO of a company called Solonis, and I'm just curious what you think about software and the German tech environment. This is especially relevant right now because

SAP, which is, of course, the whatever you want to call it, the sales force of Germany is enterprise SaaS. They just took the crown as the most valuable company in Europe. They just overtook Nova Nordisk as of this week, now worth $320 billion. So I have the same question as Scott. It looks like maybe German tech is seeing a resurgence, but historically it hasn't been

that great. I'm a sell-side economist, so I will not give you any trading recommendations or any individual titles. But, Scott, let me just start a bit longer because you're fully right. This is

Risk aversion, I think, is one of the more general explanations. And I lived abroad for a long while and then came back to Germany 11 years ago. And then you come to your own country, but with a fresh pair of eyes.

And what I noticed in the very, very first day, so you go to a grocery store and then you have this kind of elevator music in the background plus some commercials. And these commercials were about what? Security stockings and insurances. And this was already somehow telling that we are not a risk-loving culture. We are risk-averse.

And this applies to actually most of Europe. I would argue this is also one of the biggest reasons why we, for example, need a capital markets union, a European capital markets union, which could then also not only change cultural risk behavior, but would also allow us that we really have kind of private risk capital. So when you look to tech companies, to startups in general, it is very hard in Europe to get funding.

And this is why they very often then move to the U.S. And we do have many smart people. We do have very good universities at clearly much lower tuition than in the U.S. But when these smart people then develop something,

They hardly ever end up in Europe because they are either not supported by the university or the surroundings. They don't find that there is capital, so they move on. Turning to Germany and tech,

We had over the last couple of years clearly some very interesting fintechs coming out of Germany. As I said, sell-side economists, I won't mention any names, but there is clearly something going on. We also had in Berlin, for example, a very good sound startup community. So that is also something that has clearly been happening.

Regulation, access to capital is probably the biggest hurdles in Germany and in Europe to make any startup.

including the tech companies, really successful. And this is why, Adia, you mentioned one of our champion league players in Germany, and you also know when they were founded. So I think they are more or less my age. So this is no longer a young startup.

We are coming from behind now compared with the US, compared with China. And you're fully right, Scott, that it looks as if China took over the European position. But I think that Europe has understood. So an important milestone was this report by Mario Draghi last fall, an important one.

Germany's fiscal U-turn now is another important one. Europe never moves extremely fast, but it moves. And if Europe now really starts to reduce bureaucracy, regulation, provides better access to risk capital, I'm still positive that we could see some new unicorns coming out of Europe.

Carlsten, one final question from me. We've discussed many of the downside risks and the upside risks for Europe. We haven't fully gone into the tariffs.

Trump has announced these reciprocal tariffs that are supposed to go into effect on April 2nd. We don't really know the details, but it should affect Europe. Just as we wrap up here, give us a sense of what these tariffs will do to Europe, what Europe's reaction has been, and how impactful they might be. They will clearly be impactful. Germany...

exports, I think, 150 billion euro per year to the US. So if we were to see 20, 25% tariffs, obviously this is going to hit German and European exporters.

To determine the full magnitude is, in my view, impossible because we simply don't know the price elasticity. I think someone being able to afford a luxury German car in the US will also be able to pay 20% more on that. But it's going to hurt. And that is, I think, the important one. It's going to hurt a...

a still hardly growing economy. You know what? To me, even more than only tariffs, the biggest risk for Europe is that if the U.S. administration was also to deliver the tax policies that are in the plans, so if the U.S. administration really manages to make the U.S. economy more attractive, then tariffs...

are not only about this kind of short-term shock or negative impact on Europe, but they are rather this stick to relocate production out of Europe to the US. And I think that is, to me, from a European point of view, the biggest risk for Europe. And the even more interesting thing right now is that we will have –

And that is the challenging thing for economists these days. How do you forecast the whole thing? We have two extremely opposing drivers. We have the looming tariffs that are clearly Euro-negative.

And we have the fiscal packages and defense spending that are Euro-positive. You know, how do you make a reasonable growth forecast right now? Extremely hard. Carsten Brzeski is the global head of macro research and chief Eurozone economist for ING. He previously worked at the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow at Harvard University and member of the Advisory Council on International Affairs for the Dutch government and policy.

Parliament. Carsten, this was very enlightening. Really, really glad you could join us today. Thank you for your time. Thank you, Carsten. Thanks for inviting me.

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mia Silverio is our research lead. Isabella Kinsel is our research associate. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Profity Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday. I have time and mind.

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