On Thursday last, Emmanuel Macron gave his second ‘Sorbonne’ speech (the first was in 2017) which consisted of laying out, once again, his vision for Europe, though in a more bleak way, and as it happens, periodically stating ‘I’ve gone on for too long’, and then speaking for another twenty minutes.

I was in London at the time so didn’t have the opportunity to walk up the hill to eavesdrop on the president, but it did remind me of another Sorbonne speech, given some twelve or so years ago by Jack Lang, in honour of the Irish president Michael D Higgins. Jack Lang was called upon at short notice because Jacques Delors was ill, but he nonetheless gave a very credible talk on Irish culture, notably on the work of the playwright Sean O’Casey.

I left the Sorbonne as soon as the speech finished, and so did Lang and serendipitously I had the opportunity to walk back towards the 4^th arrondissement in his company. What I was most struck by was the number of people who stopped Lang in the street, to shake his hand or take a selfie, and I am not sure that there is a French/German or other European politician who would get a similar reaction whilst traipsing across their capital city. The lesson then is that there are votes in culture, but maybe not grand ideas on geopolitics or finance.

To be fair to Macron, he is one of very few European large country leaders capable of setting out a vision for Europe (Stubb and Tusk might also have a go). Some elements of the speech – to make Europe a world leader in spacetech and AI by 2030 are, from my experience, not credible. Similar goals in quantum computing, new forms of energy technology and biotech are.

The real question however, is who is going to pay for it? Is Macron – and Europe for that matter- a Madame Bovary, addicted to fanciful spending with no means to pay for it?

Compared to the US, Europe is much less well equipped to finance these new technologies at scale. Japan and China are also constrained, but China to a large degree can commandeer private industrial capacity.

One early response to the need for Europe to become more dynamic financially was the launching in 2014 of the capital markets union (CMU) which was headlined by the aim of moving corporate financing away from bank lending to deeper capital markets, and the harmonisation of finance regulations so that capital can flow better across the euro-zone.

The capital markets union soon fell by the political wayside (there have been some advances such as the ELTIF – long-term financing product but little has been done to align pension, insolvency and tax frameworks). However, while the likes of Macron are now touting CMU is a necessary part of Europe’s ‘rearming’, EU leaders ducked the chance to accelerate CMU at a summit last week, arguing it would impose greater costs on local asset managers (the reality is that capital markets in those countries – from Ireland to Belgium – continue to shrink).

This is a great disappointment, and it is little surprise then that the overriding tone of Macron’s Sorbonne II speech was urgent. The irony now, given France’s reputation for regulation (the best explainer of this I have read is Augustin Landier and David Thesmar’s ‘Le Grand Méchant Marche) is that it is mostly French officials (Macron, Lagarde, Le Maire) who are pushing for capital markets union. Indeed the former ECB official Christian Noyer has launched a policy initiative in the space.

The sense of urgency should be all the greater when we hear that the US economy (which was the same size as that of Europe before the global financial crisis) is now 70% larger, and that JPMorgan has a market capitalisation as large as the top ten euro-zone banks. America’s ability to fuel innovation and business operations with finance is exceptional, and the failure of governments in many European countries to properly acknowledge this is disappointing.

My suspicion is that the paths of least resistance will be the loosening of investment regulations so that wealthier, professional investors can access segments like infrastructure and private equity, and even more likely (this will also be the case in the UK under Labour) that Europe’s technology infrastructure of the future will have to be funded by private capital, much of it from outside Europe. A halfway house towards realising this objective will be to permit state and semi-private pension funds invest more in private equity (along the lines of the Canadian model)

Doing so might also provoke a radical change in governance, where pension funds have to be more active and where there is greater public representation on boards. It is an experiment worth trying, far more so than the option of forcing pension funds to hold more government bonds, and thus saving the political skin of politicians in indebted countries.

Have a great week ahead,

Mike 

One of the fascinating elements of the post globalization changing world order, which I call the Interregnum, is the way alliances are breaking down (might a Donald Trump led America leave NATO?) and being built up (recall the idea of ‘The Fourth Pole’) as well as being disrupted (Russia’s de facto invasion of central Africa – see The Man on Horseback). The latest example is the fusing of bits of the ‘Quad’ with AUKUS (Australia, UK, US).

In ‘The Levelling’ we had described the Quad as the club of India, Japan, US and Australia, as effectively a bulwark against China’s influence in the South China Sea theatre. The new development, given on one hand India’s diminished credibility and commitment as an unblinking friend of the West, and on the other a renaissance in Japan’s economy and sense of itself on the world stage, is that there is serious talk of Japan being ushered into another geopolitical club (AUKUS).

Given that AUKUS was initially established on the premise of providing new submarines to Australia, and that it is now very unlikely to get these before ‘the next war’, Japan might want to think again.

For my part I have been trying to think of the things Japan has in common with the AUKUS countries (culturally and structurally it arguably has more in common with France). Rugby might be one, but America is not a rugby power, and neither does it have a royal family at the head of the state, though the Trumps might change that.

Appropriately though, given that the Augusta Masters is on this weekend, Japan and the AUKUS countries are all ‘golf states’. Indeed, granted that Russia, Iran and Pakistan are not golfing strongholds, the propensity of a country to play golf, might itself be a geopolitical identifier.

There are close to 40,000 golf courses in the world (according to Golf Monthly) with 16,750 in the US, then Japan second with 3,169, the UK and Canada (this week Justin Trudeau has also spoken warmly of AUKUS) next with over 2,000 courses each, followed by Australia (1,600). Some small countries – notably Sweden and Scotland have more golf courses than China (only 566).

If golf is a marker of Anglo-Saxon and/or bourgeois roots, it is also a tracer for speculation and excess. This week it was reported that the joining fee for luxury golf clubs in Florida has pushed into the millions in some cases, and has tripled in others. This is likely a sign that the local economy in Florida is strong, that the broad wealth effect in the US is robust and potentially that we may be seeing a wealth ‘peak’ in the US.

To bolster this view, consider Japan, whose stock market and property sector are just reaching levels last seen in the early 1990’s (while Tokyo prices have recovered to 1991 levels, the rest of the Japan’s residential market is still below the price point reached then). In the late eighties and early 90’s, Japan was the coming power (Ezra Vogel’s book ‘Japan as Number One’ was emblematic), so much so that Donald Trump went on CNN to castigate American foreign and trade policy on Japan, though he did state in the same interview that he had no designs on the White House.

One of the remarkable socio-economic trends in Japan at the time was the startling rise in Japanese gold club membership fees, which in the heady 1980’s Japan, had become a tradeable asset, so much so that an index was created (always a warning sign). During the period 1982-1989 the average golf club membership fee rose by 400%, with a final 190% spurt from 1989 to 1990. Companies such as Ginza Golf Services initially made a lot of money trading golf club memberships and at the peak of the market some were changing hands for close to USD 3mn.

The rest as they say, is history. In recent years the sport of golf has been in thrall to Saudi Arabia, whose version of ‘luxury’ capitalism has luridly distorted prize money and appearance fees. Interesting then that a couple of years after bidding up golf prize money stakes, the Kingdom is scaling back its ambitions for NEOM and The Line, two futuristic city projects.

It might be too early to tell if the golf curse has struck Saudi, and Florida for that matter, but it confirms a sense that in certain parts of the world the wealth effect is beginning to become disorderly.