You know, as I started writing today, I tried to think of a headline to suck you in. If you’re reading these words, you’re either a loyal reader or you got sucked in, which was my purpose. So let me tell you where I’m going with this.
At Real Vision, we just completed week one of programming of a series called “The Exponential Age”. And the gist of it is that there’s a hypothesis gaining ground that technology has hit an inflection point where advances in individual areas are coming together so rapidly that technological change in the next 5 to 10 years will be off the charts fast. The thinking is that your head will spin from how quickly technological innovation advances.
I have some thoughts on this around Europe and I want to put them forward to you today.
European cohesion
This all starts with the Euro project, which came very close to unravelling during the European sovereign debt crisis. Let me describe this in somewhat broad sweeping terms.
The euro area is an economic landscape on par with the United States in size and scope. And in a world where having a sole superpower is undesirable, a cohesive European economic landscape makes sense. The problem with European cohesion is sovereignty. And the Euro project is the most existential threat to the sovereignty of individual European Union nation states.
So, while we got through the European Sovereign Debt Crisis intact, the threats to sovereignty in the EU remain as an existential threat to the EU’s cohesion. While it’s ironic that the UK is the first to leave the EU given that they possess their own currency, I would argue the departure was precipitated by the same sovereignty threats that still lurk beneath the surface in the EU today. One of these comes in the form of the debt and deficit rules.
Now, it’s great that Europe was flexible enough to suspend the rules in the pandemic. But eventually the pandemic will be over. And then the same old rules will apply. And attempting to enforce them will bring the Euro area member sovereignty issues back to the surface. What better way to defuse these tensions than to use the Green Revolution as a Trojan Horse.
The Carbon Emissions Mandate
In a ruling hailed as groundbreaking, Germany’s top court said Thursday the government must set clear goals for reducing greenhouse gas emissions after 2030, arguing that existing legislation risks placing too much of a burden for curbing climate change on younger generations.
The verdict was a victory for climate activists from Germany and elsewhere…
[…]
Lawyer Felix Ekardt, who brought one of the cases, called the verdict “groundbreaking” for Germany.
“Germany’s climate policy will need to be massively adjusted,” he told reporters.
Fellow lawyer Roda Verheyen said the decision would likely mean Germany’s plans to phase out coal use by 2038 would need to be brought forward, in order to realistically achieve the country’s long-term emissions target.
Here’s how to think about this:
- Germany is the largest country in the EU and the Euro area. Arguably they often set the standard. Think of it as akin to the role California’s CAFE emissions standards have played for US autos given the size of California’s market.
- As such, when Germany pulls forward its carbon emissions reduction timetable, expect this to reverberate outward. Soon, there will be a massive need for change throughout Europe to meet these standards.
- The goals are so ambitious, Europe will have to ‘get rich or die trying’. That means European businesses will have to beef up i.e. get rich on carbon emissions reduction or they are never going to meet their goals.
- The German court has basically told us option #2, “they are never going to meet their goals” is unacceptable. It creates an intergenerational risk transfer. And so, by law, Germany must reduce carbon emissions. There is no alternative (TINA).
The Green Revolution
This is a big deal. When we talk about massive technological change, think of the drive to reduce carbon emissions in Europe as case in point.
Today on the Real Vision platform, our CEO, Raoul Pal, appeared in an interview with Volkswagen Innovation Head Nikolai Ardey to talk about the future of electric and autonomous vehicles. And I see this as ground zero for what’s about to occur in explosive tech innovation in Europe.
Ardey said that the spread of electric vehicles in an exponential way cannot be stopped anymore. I think he said something like 60% of all (new?) cars will be electric by 2030. And he also said that there was no alternative to EVs technologically given the emissions mandates, the need to build infrastructure, and the price of competing ‘green’ vehicle power source alternatives. His view is that we will see a massive reduction in EV battery costs and a concurrent build up in EV infrastructure. And I took this to mean that the network effects will become so large from a capital investment and ubiquity standpoint that there will soon be no turning back.
Directionally, this seems right to me. It basically means a wholesale revamping of our combustion engine-oriented transportation infrastructure to accommodate electric vehicles. And to the degree Europe moves there early by mandate, it is guaranteed everyone will have to follow — much in the way everyone moved from twisted-pair coaxial telecom infrastructure to fiber optics; the benefits will be so obvious that no one will want to be left behind.
So, there’s a Green Revolution coming. It’s mandated by law in Germany. And it requires a massive lift in technological advancement, likely enhanced by government largesse. Put simply, “European tech is about to explode”.
European tech meets cohesion
This is where the Trojan Horse comes into view. See, the problem for Europe is that the rules on government debt and deficits are onerous. They’re deflationary and anti-growth. But they are the rules. And policymaking elites in core Europe are still very much wedded to them, particularly in Germany.
But now we have a legal imperative that will require a massive amount of capital investment. And the reality is that it will likely require government largesse on a gargantuan scale. And these investments will be budget-busting. Because it is the Germans who are thrusting this requirement onto themselves, it also means this spending is likely to be exempt from deficit and debt rules in some way. And so, right there, we have the makings of cohesion that sidesteps fiscal and monetary sovereignty issues, thrusts Europe into a technological leadership role, and creates boatloads of high-paying jobs. This is also very much in line with the incipient move toward fiscal dominance that is happening globally.
I spoke to Dario Perkins, an economist at TS Lombard about this two weeks ago. And his ideas are very much in line with this. His idea is that on a national level, spending required to meet Paris Accord protocols will be exempt from Maastricht Treaty deficit rules. And I would go one further and say we are likely to see much of this spending occur at the supranational level. That way, you create a much larger EU-wide budget which solves three problems:
- It removes the deficit issue as an area of potential conflict regarding sovereignty.
- It ‘locks in’ chronic debtor governments because of the desire to benefit from EU-wide largesse
- It creates the need for EU-wide financing that can act as an EU-wide safe asset to replace German Bunds as the de facto EU safe asset. And doing so will pull more capital into the EU area at the expense of the US dollar area.
My take
Now clearly, much of this is speculative. But I think the writing is on the wall regarding a push toward green energy in Europe. And I also think we are likely to see the Green Party do so well in German elections in September that they might even take the reins of government. A Green Party-led coalition with the FDP would be a combination that would be much more likely to implement a budgetary strategy that ended in this result.
Meanwhile, VW’s innovation head said something I found interesting. He talked about vehicle cost of ownership in the trucking business. And it occurred to me that cost of ownership is a much more dominant investment variable for business vehicles than it is for passenger vehicles. To me, that suggests changes in technology that drive business ownership away from combustion engines is the area we need to be watching more closely.
As for the market implications, maybe this green energy push will yield a robust European technology tableau. It certainly has the potential. And then we can stop talking about the richness of the US market’s multiple being justified by the mix of companies in the index.