Bucking The Trend

There is an interesting article in the current issue of Foreign Policy about what the author calls the ‘Euroinvasion’ (see article). It would appear that European companies are taking advantage of the current strength of the Euro against the US Dollar and are buying US companies. The example cited is that a US company priced at $500mn would have cost €430mn in 2003. In 2008, the price tag would have fallen to €316mn for that $500mn company. Cross border mergers and acquisitions are not new, and are the inevitable consequence of the process of globalisation. However, what is significant is the strength of the trend. It might indicate something more substantial than the ebbs and flows of currency movements.

Our attention was recently drawn to the Global Financial Centres Index (see report). In this, London rated higher than New York as the leading financial centre in the world. The report does come with a health warning – it was produced by the City of London, which is bound to highlight its strengths in the weights within the index, and part of the result can be explained by the strength of Sterling against the US Dollar. However, despite this, there is also something there. London has become a centre for the recycling of Middle Eastern and Russian petro-surpluses. It is seen as having a lower political risk than New York, and the city has developed as a residential centre for super-wealthy individuals.

These two conclusions fly in the face of the current conventional wisdom that the centre of gravity in the global economy is shifting towards Asia. Whilst it cannot be argued that Asia has come to dominate manufacturing on the global stage, it is more instructive to consider how that wealth has been stored. The key Asian economies – Japan, South Korea, and China – have tended to store their surpluses in the form of US Government debt. This provides us with an important part of the jigsaw puzzle.

How do Empires decline? In the case of the British Empire, the long term depreciation of Sterling allowed other nations – principally the US – to buy the assets of the Empire. If this model is valid (long term currency depreciation allowing the purchase of domestic assets by overseas entities), then we can see it in practice today with regards to the US. If it is true that European companies are purchasing the US corporate sector, that Asian Governments are funding the US public sector, and if European centres have displaced US financial centres as financial powerhouses, then we have a clear view of how the long term decline of the US might occur.

Of course, the future is not certain and the US could reverse this trend. However, experience to date suggests that it may not do so. A key element in reversing the trend would be to embrace open market capitalism. Sadly, the parochial pork belly politics of the US is taking it in the direction of the protectionist agenda of the neo-nationalists. It is ironic that the champion of market capitalism is unable to follow that particular ideology. In our model, this will be the eventual undoing of the US.

In our thinking, as Europe is now engaging in the sort of market capitalism advocated by the US, it is faring well compared to the US. This could be the basis for a renewal of the European economy. If it is, then we are bucking the trend of conventional wisdom by suggesting that the future may not be Asian. It may be European.

© The European Futures Observatory 2008

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