Building a big beautiful Europe
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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 columnist 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? 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. Okay.

Is it, may I ask, insanely hot? Because like Europe is in an actual oven at the moment. No, it's not that hot, but it's so humid here that if you clap, it starts to rain. So...

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. 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's the time. And the thrust of my conversation with him, interestingly, was, now's the time because Trump is.

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 Leda 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.

Oh, yeah. That is a pretty mainstream view. But 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 like loads of different like 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, sake of argument, Italy, and you want to sell it to somebody in, 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 U.S.,

And I think we should note it's not just 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 U.S., a China, broadly speaking, in the same league. But where do all its pension savings go? There should 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. Yeah, you are welcome. But so also a lot of money in Europe and in the UK, for that matter, sits in like savings accounts where you just get like, you know, a bit like a money market fund or whatever in the States. You don't get much interest on these things. Yes.

We're very reluctant to put money to work in stock markets or whatever. We just do not think the same way as the Americans in this regard. Yes. Buying equities is so American. We are just naturally swivel-eyed speculators in this country. And for good or for ill, that's how we are. Yeah, it's like apple pie and American ball sports and...

buying stocks. So how do we get there? I mean, I think that's the big question for Europe is...

Europe has collectively achieved incredible things in the past. They switched to a single currency. This was an amazing thing. But how do we kind of take these next steps? The thing is, as I said at the top of this discussion, Enrico Letta and Mario Draghi, like these are the really big beasts of like high level European finance. They both wrote these reports last year, like I say, saying, can we just please, for the love of God, get on with this? Yeah.

And everyone took these reports and said, oh, yes, very interesting. I'm going to put that report somewhere very safe. And it was kind of like a sort of nice to do exercise and quite a useful intellectual exercise, but ultimately didn't lead to any immediate change. And then, as you say, along comes... Da-da-da!

Donald Trump. And suddenly the urgency is right there because suddenly there are lots of very big, serious investors around the world who are thinking, hmm, I've got an awful lot of assets in the US. Maybe I want to rebalance a little bit away from the US and into something else. And maybe I'm not as comfortable in the rule of law in the US as I used to be. And maybe I just

don't quite trust the dollar and US government bonds in quite the way I used to be. They're not dumping all of these things en masse. So before you email me, because I do get these emails, that's not what I'm suggesting. I don't think people are going to necessarily dump US assets, but I do think over time they're going to bulk up in other parts of the world. And so suddenly...

there is a push in Europe to say, listen, there's demand here that wasn't there before. We must rise to this moment. So what sort of things was Enrico Letta saying that could actually be concrete steps to get to that point? Yeah, before I get to that, which I will very shortly, I just want to mention that there is another impetus for integration, which is if the US steps away as the world's

policeman, as the defense umbrella for the world, Europe needs a mechanism to raise a bunch of money to buy a bunch of tanks. And they don't want to do that in a thin capital market. They want to do it in a big liquid capital market. So they better get themselves one. So that's another. Now, on to Letta's proposals. The most interesting one for me is he points out

that there's a kind of problem when you start, if you're going to start a financial company,

a financial services company, a fund, whatever, even a bank in Europe. You start in a specific country, Italy, Greece, Germany, wherever. And then every time you want to expand more in Europe, you have to like take on a whole new set of rules. So when you go from Italy to Switzerland to whatever, and it's like, and you're facing, you know, a whole new set of competition and people who are trying to use rules to keep you out. And it's a nightmare. Yeah.

I mean, Switzerland is a bad example, but I'll let you off just because you're American. But like a proper EU member. Random European places. Yeah, okay. My bad. Okay, so random European places. Now, what if you had a place that was like Delaware, but wasn't even a place? And Leta calls this the 28th regime, which is like a virtual country where companies can incorporate people.

It's a bit like in America, you incorporate in Delaware, and that kind of is a great place to incorporate and gets you access to the whole country. This, you incorporate in the virtual 28th regime. I think that's what they call it, the 28th regime. And it's like you have your European passport, but you have not been tied down by the rules of any specific European country. And the thing is set up so it gives you a very smooth entree to the whole market.

And you can incorporate your old company there. You can put your new company there. And it's like instead of dealing with 28 markets and 28 sets of rules and 28 bankruptcy procedures, suddenly there is one. Remember, we had this huge fight right after Brexit.

London was the de facto financial capital. And it was like, oh, who's going to be the new London for Europe now that the Brits have left us and the UK has left us? Is it going to be Frankfurt? Is it going to be Paris? Let's have a huge fight. The virtue of this thing is that it's nobody.

So we don't have to have a huge fight over who wins this one, right? And the beauty of it is as well that then you're not relying on all the individual member states to change all of their domestic laws to sort of suck in Brussels law when it can kind of be an opt-in thing. Opt-in for certain countries, opt-in for certain companies.

What I find interesting is, you know, I've been doing this stuff an embarrassingly long time and people have been talking about now's the moment for Europe for like ever. And it just like never happens. But now we've moved along from Europe.

Europe kind of saying, oh, no, it's really bad. We just don't compete in quite the same way as the US to, OK, let's let's get it like a flip chart and write down exactly what we can practically do to move this forward and stop just whinging about it and start actually making some progress. So the stuff that Leto is talking about there, I think, is really important. But also, you

There's been quite a lot of work done recently, again, among the big beasts of European money, if you like, including Philip Lane, who is the chief economist at the European Central Bank. He put out a paper recently, gave a speech about the Eurozone government bond market. And one of the things that he talked about was...

Around the time of the Greek debt crisis, so, you know, that kind of crystallized from like 2010 through to the next couple of years, Europe was not in a good place. The gap between borrowing costs of all these different European member states just exploded, like...

You could drive a bus between these borrowing costs. They were just huge. Let me interrupt you there for a second and just try to explain this a little bit for our U.S. readers. We take it for granted in the United States that when one region of the United States has a surplus or a deficit...

There is this kind of or a crisis or is having a boom. There is this kind of aggregation function in the federal government that's like when there is a huge natural disaster in Louisiana or the Gulf Coast of Florida, Uncle Sam is going to straighten some stuff out.

In Europe, when Greece gets into a crisis, like Germany and France are looking at each other like, are you going to help these people out? It was a whole thing in Europe. Like, if you're too young to remember that period, congratulations. It was awful. It was just this grinding crisis that went on for years and became, and there was this constant, will Greece drop out of the Eurozone thing, which it never did. But what, for,

What Philip Lane was pointing out in this speech is that those massive kind of gaps between different countries' borrowing costs have just collapsed over the past couple of years. Very interesting point. The scale of integration now. So suddenly, this is a conversation that maybe Germany can participate in because for Germany, it's not a case of saying, well, hang on.

why should I pay like interest rates that are somewhere between me and Italy when I can just pay my own interest rate, which is really low because I'm a really safe borrower. So there's less of a freeloading problem and

There's just an easier potential process to have this conversation. And also, Europe is not suffering a kind of Greek sovereign debt crisis type situation. So it's not run out of bandwidth. It's got the bandwidth to think about how to do joint borrowing. So Lane was pointing to proposals that were made for joint borrowing back in 2010, which at the time, again, everyone was like, mate,

Got my hands a bit full here, dealing with a Greek debt crisis. Cannot think about this right now, if that's all the same with you. But the idea is that you have red bonds and blue bonds. So red bonds are national bonds that are attached to different individual member states.

Blue bonds are joint borrowing that are linked to specific streams of revenue that's ring-fenced in each country that goes into a pot of blue bonds that are issued. And then the proceeds from these blue bonds go to buy red bonds in the secondary market. So it kind of replaces some of the national debt.

If, big if, you can do that at sufficient scale, then suddenly, ta-da, you have a common borrowing framework that you could do that could really start to pull some traffic, if you like, away from treasuries. Now, would this be easy? No. Is now time to have a very serious conversation about whether this is the sort of landing point and how we can get there? Definitely yes.

So those are the sorts of conversations that I'm having with people in kind of high finance in Europe is saying that we really need to kind of stress test these ideas and figure out what is possible rather than just whinging all the time.

I think it's very important that you use Germany as the example there, because, of course, Germany is one extreme end of the European financial ecosystem in that they're a lender country, not a borrower country. They have the closest thing to a European safe asset that exists now, which is the German Bund. But I think at least...

It sounds as if attitudes have changed in Germany over the last 15 years, where maybe before the European debt crisis, it was like this attitude is, why should we pay to support these awful borrowing countries when we're the lending country? We are very virtuous and they are very wicked. Whereas now...

the attitude is more like well actually you need consumption and production you need lending and borrowing and we are kind of all in this together and to listen to enrico letta when he talks to people in the german government and in the bundesbank they are receptive to ideas like the 28th regime and two now a big part of his job is being optimistic about all this and so he's going to be optimistic

But I think there is some truth to the idea that some rigid attitudes that might have existed in 2013 at different ends of the Eurozone and in the single market probably aren't quite as rigid anymore. Well, yeah. And we've seen Germany this year kind of take the brakes off, right? And agree to borrow lots more money to fix German infrastructure, to fund defense, and also, guess what, guys, to try and foster faster growth. So...

Yeah, like I say, a lot of the stars do appear to be aligning here. My grand idea for how you could really push this forward is you need a charismatic, serious, well-liked, well-respected figure to carry it. I'm right here, Katie. You're not available. I just don't think they want an American. You're not available. I think they probably need a European person.

You think this can encompass Switzerland. You are wrong. But you know what?

Draggy bonds. There's an idea. Get Mario Draggy. You know, there are people in finance who will follow this man to the ends of the earth. Yes. You know, if you get someone like Mario Draggy or like Enrico Letta to kind of be the point person here and to push the case and to make the case for it in individual member states and to attach their name to it, suddenly you have draggy bonds. You have letter bonds. Oh.

I've totally plucked this out of the air, I will admit, over the past like hour that I've been thinking about it. But I think it makes sense, right? You need someone to be that guy or that woman. Yes. Yeah. No, I think that's true. I also think, and Leta made this point in my interview with him,

you need to get some pre-committing going on, by which I mean you need to start setting deadlines. And that was crucial in the creation of the Euro process. They kind of talked themselves into it. They're like, by XYZ date, this is going to happen, people. By hook or by crook. By hook or by crook. So you need hard deadlines and we need someone, I agree with you, or a cabal of people who are like the leadership and who push this baby through.

I think one thing to really bear in mind here is that Europe is very, very good at arguing with itself. And this is like hard coded into European DNA. So none of this stuff around joint borrowing, around imagine new jurisdictions for companies to domicile themselves in.

This is difficult stuff, right? This is really hard. And if you're expecting someone to wave a wand and for it to suddenly happen, then you have not been following European politics very well for the past, ooh, forever. So this is going to be difficult. There's a very standard kind of collective action problem here, which is called the problem of getting the turkeys to vote for Thanksgiving, which means there are people who have...

power invested in the local political and economic structures who will be giving up some of that power when the power is centralized. And somehow those people have to be induced to see that it is in everyone's long-term best interest and indeed their long-term best interest to let some of that local power and authority go to the central authority. And that's not easy. That's never easy. Yeah, just got to let it go.

So what's your sense, Rob? Now you're a new convert to Europe, having spoken to Enrico Letta. Do you think we're going to see some serious progress here while Trump is still in office? I'm a has-to-get-worse-if-it's-going-to-get-better guy. So the risk here is not that the process falls apart because of a crisis. The risk is that there's not enough of a crisis yet.

that the pressure is not on. So the heat has to stay high. If things are not that bad and Trump kind of lays off on the pressure and we all shuffle through and the world economy is okay, then you can see the talking and the paper writing and the presentations going on forever. But if the heat stays on, things can happen. What's your feeling? Mr. Lester, Mr. Draghi, if you're listening, and I'm sure you are,

Keep the pressure on. Yes. Just make everyone think we're living in a state of perma-crisis and maybe we'll get some progress. Because I'm optimistic, I have to say. And I speak to asset managers and to bankers who vary in opinion on this. But I fall in the optimism camp. I think something is cooking. So maybe this time is different. On uttering those fateful words, let's take a short break for Longshore.

The latest PGM Real Estate Outlook is out now. So 2025 to be an attractive vintage year. So based on history, based on historical cycles, in fact, the opportunity for capital value growth to be stronger is obviously a key theme we're going to be focusing on over the next 12 months from a research perspective. But it also investors need to adapt to changing market conditions. Explore the report at www.pgmrealestate.com forward slash global outlook.

Okie dokie, it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Rob, what you got? I am short the big, beautiful bill, man. Look, we don't know how much American debt is too much, but this bill gets us closer to that. You know, it builds the deficit, it builds the debt, and at some point,

People are going to stop wanting to buy all these treasuries, whatever tricks we play, whatever we call it. And man, this is not a responsible bill and I am down on it. Okay, that's reasonable.

I'm going to have two, if I may. One of them is I've got a young man shadowing me today on work experience. He is short gigs, or in particular, he's short the price of gigs. Like, tickets for concerts are just too expensive, man. How is a youngster music fan supposed to afford to get their parents to pay for tickets for things when tickets are this expensive? I agree with him. But I am also short...

all sorts of hot in London at the moment and we don't cope well with this and one of the things that people say when it's really hot is, ooh, you should drink a hot cup of tea on a hot day, cools you down. No, it doesn't. It does not. This is a false thing. This is a wretched English lie spread by big tea.

It's simply untrue. People have got to stop saying it. This is a hill. Do not believe the tea industry's lies, everyone. This is a hill I'm more than willing to die on. Ironically, I am going to go upstairs and have a nice cup of tea now. I'm hard-coded, what can I say? But it's not going to cool me down. We'll be back on Thursday. Listen up then. And in the meantime, stay cool.

Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.