Saxo Bank forecasts for Q3: European revolution

Freedom, equality, fraternity, that is, a departure from privileges ancien regime'uis the most important slogan of the eighteenth-century French revolutionaries. Today it becomes increasingly apparent that we are once again dealing with a "revolution in Europe" as voters in most countries, especially the youngest, are strongly against status quo. Everyone is eagerly awaiting the elections in Germany on September 26, which is likely to be won by the Black and Green alliance, but it is possible that the Greens will win the majority and it is from their party that the next chancellor will come!

About the Author

Steen Jakobsen, Chief Economist and CIO Saxo Bank. Djoined Saxo in 2000. As a CIO, he focuses on developing asset allocation strategies and analyzing the overall macroeconomic and political situation. As head of the SaxoStrats team, Saxo Bank's internal team of experts, he is responsible for all research, including quarterly forecasts, and was the founder of Saxo Bank's outrageous forecasts. Before joining Saxo Bank he cooperated with Swiss Bank Corp, Citibank, Chase Manhattan, UBS and was the global head of trade, currency and options in Christiania (currently Nordea). Jakobsen's approach to trading and investing is thought-provoking and is not afraid to oppose consensus. This often causes debate among the global market community. Every day, Jakobsen and his team conduct research in various asset classes, covering major macroeconomic changes, market movements, political events and central bank policies. With over 30 years of experience, Jakobsen regularly appears as a guest at CNBC and Bloomberg News.

Is the European Revolution Coming?

It would be a revolution. The Green Party is very pro-EU, anti-Russian and anti-Chinese, it opposes the Nordstream2 project, and, not least, it strongly supports the idea of ​​abolishing the German Schuldenbremsen, or "Debt brake", which is the basis of the German fiscal austerity regime. This means that just the day after the elections - September 27 - we can wake up in a new Germany and a new Europe.

The elections in Germany are also likely to show how the youngest generation of politicians should distinguish themselves from the older generations. Born in East Germany and speaking Russian, Angela Merkel was thrifty and patient, and often used the scientific modus operandi assuming the pace of politics should be factually and timely rather than allowing the social media rollercoaster to shape the political agenda.

Merkel was one of the key creators of the German export miracle, but failed to increase investment in German infrastructure. In effect Germany have one of the slowest internet connections, the lowest digital use rate and a policy of usually correcting errors from previous years instead of setting a vision and building hope. Angela Merkel was a man of compromise. But young Europeans want the exact opposite: a vision for a Europe that is more eco-centered and hopes for a good job and access to real estate, rather than one where old politicians are guided by yesterday's priorities and avoid conflicts at all.

In fact, one major revolution in the European Union has already happened and is increasing the stakes of the German elections even more. Last year, the European Commission secured a mandate to issue mutual EU bonds. It is said that no crisis should go to waste and therefore the EU has taken appropriate action, even if the scale of the program compared to the EU's overall fiscal effort is modest at best. However, this step cannot be underestimated - and now that we have an "instrument" in the form of EU bonds, elections in Germany will initiate the process of building political readiness for full involvement in the European project - a project based on the shaky foundations of the fiscal sovereignty of individual Member States, which they have no control over their own currency or monetary policy. 

In the case of the black-and-green coalition in Germany, this situation will change - perhaps slowly at first, but the process will be significantly accelerated if the Greens come to power. We see a future where the EU will mutualise even more of the debt of its Member States. The justification for such a pursuit of fiscal mutalization is very simple - first of all climate agenda, but also inequalities, poor infrastructure i threats to foreign policy in the context of a less secure alliance with the United States. The European Union indicated that EU bonds were a temporary solution, but the same was said in the 60s when Denmark introduced a comprehensive VAT of 9%; currently the rate of this tax is 25%.

Forecast for Q3

When we give to politicians and the general political system carte blanche both in terms of obtaining and spending money, we can be sure that they will do just that. An example is the EU budget for 2021. The EU is issuing up to EUR 100 billion under the SURE program to support job creation and job retention. The EU's € 800 billion NextGenerationEU plan aims to remedy the economic and social damage caused by the Covid-19 pandemic and make Europe greener, more digital and more resilient. So far, the limit is 5% of the EU budget - who wants to bet how much it will be in 2050?

Revolution in Europe officially assumes a political turn to the leftincluding the acceptance of further mutualisation, the application of the Modern Monetary Theory and a very clear environmental program in a new era of fiscal domination. The intentions are the best possible, but sooner or later this program will inevitably reveal its very dark side, that is, the shrinking role of the private sector, which has been the engine of economic dynamism at all times. The new priorities and program will increasingly force the "invisible hand of the market" that Adam Smith talked about to oust the excessively expanding EU public sector, increasingly resembling the final stage of the shaky Soviet planned economy, rather than A Europe moving towards a bright future. Vive la revolution.

In forecasts for this quarter our team of analysts focused fully on the effects of a potential victory for the Greens in Germany, the consequences of too much EU bond issue, demographic changes and the new, non-European UK.