The future of Europe: Jean-Claude Juncker in conversation with AXA IM
Jean-Claude Juncker, President of the European Commission from 2014 to 2019, joined some of AXA IM’s senior investment professionals to discuss trade wars, geopolitics, Brexit and the future of Europe.
Chris Iggo, CIO Core Investments, AXA IM: Given how the global economic infrastructure has developed in recent years, do you think we will avoid a repeat of the kind of crisis that we saw in 2012?
Jean-Claude Juncker: I don’t think we will see repeat of the financial and economic crisis of 2008-2009 as the Greek debt problem was on our table back then. I think the European Union is better prepared than it was at the beginning of the financial crisis, but to give more credibility to the monetary union we have to complete the financial markets union and the banking union. The most important point in my view is we have to put in place a commonly agreed deposit guarantee scheme in the euro area.
Chris Iggo: What do you see as the outlook for Europe and some of the challenges from an investment point of view?
Hans Stoter, Global Head of AXA IM Core: From a ‘glass half empty’ perspective, the labour market is quite sluggish, and we still have debt sustainability issues across Europe that needs to be addressed. The inability to create inflation in Europe does not help from a growth perspective or from a debt sustainability point of view - we can’t really grow our way out of trouble and will have to continue to rely on fiscal and central bank support in a consistently low interest rate, low growth, and low credit spread environment.
But taking a ‘glass half-full approach’ I would say that the risk of a significant reduction in asset prices in Europe is lower than in other parts of the world. The US looks pretty expensive from my perspective, and I think Asia will have higher growth but also higher volatility.
I think there is continued potential for some dollar weakness which should keep investment flows towards Europe, and the potential for increasing flows towards the euro could help asset prices.
While some industries are struggling, I think there is still an opportunity for European industry to be a leader in the energy transition - the policy environment in Europe seems very supportive to the carbon transition. We need to get all the packages in place, and it is easier to develop a plan than to execute one, so we need to see the money flowing through European green bonds but also towards our industries to make that transition happen. As asset owners and managers, we can support this transition in cooperation with policy makers.
Jean-Claude Juncker: I think next year, the situation will have improved. China and Asia are doing well, but we should not forget that although this will be an input into global growth and trade relations, the Chinese recovery is helped by state-aid supported companies, which is not a strategy I think will be successful in the long run.
We are facing a difficult situation as far as the medium term is concerned, with public debt. I think the EC is right when it is inviting certain member states to put in place proper budgetary consolidation and structural reforms. I’m not a fan of austerity policies, I think it’s overstretching and has led some countries such as Greece into awful domestic situations, but we need to be more serious when it comes to financial consolidation.
Hans Stoter: We have a number of systemic challenges in Europe. We could end up with extremely low interest rates for a very long time, which puts a lot of pressure on our clients - most would really welcome a more normal interest rate environment. If we could even get to 2% that would be fantastic compared to what we have today, but it not something we are leaning towards in the current situation.
Chris Iggo: China has just signed a trade agreement with other Asian partners. Given the new US administration and what’s happening in Europe what might China’s priorities be on the global stage?
Aidan Yao, Senior Economist and Asian Fixed Income Product Specialist: I don’t think that signing the Regional Comprehensive Economic Partnership (RCEP) is any threat to the Sino-European relationship. The two sides are in the final stage of negotiating the Sino-EU Bilateral Investment Treaty, which will further integrate the two economies. The RCEP is a high standard agreement that will force China to open up its market, increase accessibility, and align some of its standards to international norms.
In terms of priorities for China, the current five-year plan and the longer-term plan ending 2035 have four objectives. First, achieving more self-subsistence in terms of core technology and vital supply chains, mainly as a result of the changing external environment. Second, extracting more domestic growth through upgrading consumption and urbanisation. Third, further cleaning up the environment with its new carbon neutral target. And fourth, China wants to continue to open up and achieve high-quality interaction with the rest of the world, particularly in areas of financial market integration. That should present a potentially big opportunity for global investors.
Chris Iggo: Do you think governments are doing enough to lead the private sector in meeting the Paris Agreement climate objectives, and is the private sector doing enough to support governments?
Hans Stoter: In terms of the order and urgency that issues are addressed by policy makers, the current health crisis must be number one, and immediately following that the economic crisis or recession recovery - and the social crisis that goes with it, as people are impacted because of COVID-19.
But the climate and biodiversity crises need to be addressed as well, though it is a challenge for policymakers to do all three of these things at the same time. We as asset managers and owners are ready to do our piece to support the financing of the needed transition and engage with our investee companies, so they can make important changes. But I think we could have a bit more help from policymakers.
Jean-Claude Juncker: I couldn’t more agree with what you are saying. After the end of the pandemic the climate crisis will still be there, and even during our dealings with the pandemic crisis, we should not forget that the climate crisis is still here. We have to focus our attention on carbon neutrality for the coming decades. I think that public budgets need to support the efforts made by private companies to fight the climate crisis and we have to combine our efforts from the public policymaker side and on the private company side. The pandemic is a moment in our short-term history, and climate change is a major threat for the future of humankind.