Pole shift
Europe has been a bogeyman for investors for a long time now. Unreadable politics, lacklustre growth, a hesitant central bank, a sprawling regulatory environment and unclear ambitions, none of which encourages enthusiasm. At the same time, the US had everything to attract capital from across the world: strong growth, irrepressible innovation, entrepreneurial incentives, sound institutions, and a powerful and easy-to-read central bank. A perfect cocktail, which resulted in a very strong concentration of global investment flows into US assets, a phenomenon that culminated at the end of 2024.
Over the course of a few months, a dramatic pole shift has occurred. In Europe, the German fiscal revolution is reshuffling the deck for potential growth and – given the time that will be necessary to correct years of under-investment – offers unprecedented visibility on the business cycle. The European spending plan, ReArm Europe, strengthens these prospects and other countries could be encouraged to follow Germany’s example. By lowering its rates without fanfare and bringing them back to neutrality, the European Central Bank has lifted any monetary brake. It is even likely to embark on the route to accommodation in the coming months, with a clear trajectory and monetary policy reaction function. The period of extreme political weakness in the European Union following Brexit, when a series of defections were envisaged, seems to be thing of the past. Lastly, the “competitiveness compass” unveiled by the European Commission highlights that Europe has finally become aware of the weight of its over-regulation and now seems determined to reverse this trend. On this last point, nothing has yet been done, and Europe also has a few fragile areas, not least the political and economic situation of France. But Europe today offers what had been missing for a long time: visibility.
The very visibility that has been fading in the US. After two years of US exceptionalism, today, the risks are clearly on the downside for growth, with a continuous slowdown in consumption and the employment market. The erratic nature of Donald Trump’s trade policy is compounded by extreme uncertainty as to its impact on growth and inflation. The impact of the rise in tariffs and the choices made in the recent fiscal reform – baptised the “One Big Beautiful Bill (OBBB)” – will increase inequality in a country where it is already extreme. The functioning of US institutions has been under assault during the early months of the Trump mandate, to the extent that some are worried about the survival of effective counter-powers. The independence of the US Federal Reserve is under attack and communication from the central bank may be a sensitive issue in the coming months. Its extreme dependence on short-term economic data offers it little visibility at a time when these indicators are sending contradictory signals. And the power struggles that have started around Jerome Powell’s successor will result in a batch of conflicting statements. In parallel to this, pressure could increase on US rates, as the upwards drift in the public deficit will further accelerate after Congress finally passed the OBBB on 3 July. Of course, the US still has numerous advantages, not least the rude health of the technology sector. Nonetheless, much like the dollar, it has lost its status of unconditional safe haven for investors.
Such a statement would have seemed like irony a few years ago, but today it is the reality. Whilst uncertainty is an integral part of the life of markets, visibility is a commodity that is as rare as it is sought after. And today, it is in Europe that it can be found.