9.3
8.058 reviews
English
EN
This article has been automatically translated from Dutch. Click here to see the orginal article including all links to sources.
Europe is committing economic suicide, and most people still have no idea what’s coming. This week, we look at news from the three largest European economies and see that the root of the problem is the same everywhere: policy. Politics that postpones reforms, suffocates businesses, and drives away young people. It explains why investors are losing confidence and fleeing to tangible security such as gold — the so-called “debasement trade.”
You’ve no doubt heard it already: the political crisis in France has once again deepened. Even before we could properly introduce Sébastien Lecornu, the successor to Prime Minister Bayrou, he was gone. He didn’t last a month in office and resigned just fourteen hours after announcing his cabinet. On to prime minister number six in two years!
Sébastien Lecornu – source: École Polytechnique
How this chapter of the political crisis will unfold we’ll cover in another article. For now, we show how this situation contributes to a brain drain and undermines France’s future earning power. The core of the French problem lies in the budget deficit and what we previously called France’s “debt paralysis.” The system is completely stuck, and real reforms no longer seem possible. France must reform — but cannot. The French welfare state is the biggest problem. The government now absorbs 58% of the French economy.
Pensions are a particular concern. To summarise briefly, without repeating our earlier article: France operates a fully pay-as-you-go pension system. This means that, unlike in the Netherlands, no capital is built up and invested; instead, workers directly pay for the pensions of retirees. Due to the ageing population, this is becoming increasingly difficult.
Within the eurozone, France ranks number one for pension spending as a share of national income. A full 25% of total government expenditure goes to pensions. As a result, a large share of pensions is financed through new debt. Since Macron took office in 2017, public debt has increased by more than €812 billion — 44% of which went to pension spending. An additional future burden for the younger generations.
French pensioners have a higher income than workers – source: Financial Times
French retirees receive higher government benefits than their peers elsewhere in the West, and they do so several years earlier. The result is a situation in which retirees now have a higher average income than the working population who pay for their pensions. France is the only country in the world — and in history — where this is the case.
You suddenly gain a lot of sympathy for Macron’s 2023 pension reforms, which raised the retirement age from 62 to 64. But that is precisely the reform many politicians (and voters) now want to reverse. A true collision course — or, as French economist Olivier Blanchard put it: “Suspending the pension reform is a jump without a parachute.”
A company in France must spend €95,000 to pay a net salary of €39,000 – source: Michael A. Aurouet
What this means in practice is shown in the figure above. Including employer contributions, a French company must spend over €95,000 to pay an employee a net salary of €39,000. In France, the younger generations — those who must support families — are forced to make huge sacrifices for the elderly, who represent a larger share of the electorate. An upside-down world.
There is, to be fair, growing resentment among young workers and entrepreneurs toward the high taxes. But a rising number of highly educated young people simply choose to emigrate, reports Le Figaro. Increasingly, graduates from France’s top universities are seeking their future abroad.
Fifteen percent of young graduates from French engineering and business schools choose to leave the country. High taxes and low net wages are the main drivers. The most popular destinations for young French graduates are North America, Germany, and Switzerland — where one can easily earn twice as much as in France.
A survey among recent graduates shows that 57% are considering emigrating within three years, 21% of them “very seriously.” As many as 86% cite a pay rise as the main incentive that could keep them in France. Le Figaro explicitly speaks of a “brain drain.” There are now far more French executives leading unicorns in the U.S. than in France. To be continued!
Germany’s statistics office, Destatis, published grim figures this week on the state of German industry. In August, industrial production fell by 4.3% compared to the previous month, in real terms and adjusted for seasonal and calendar effects. The decline was mainly caused by a sharp drop in Germany’s largest industrial sector: the automotive industry. Production there fell by 18.5% compared to July.
Last month we already reported on the tens of thousands of job cuts expected in the sector and the production scaling-down at Volkswagen.
The evolution of German industrial output, a clear trend break – source: Thorsten Polleit
German economist Thorsten Polleit wrote on X: “Germany is in free fall — heading for its third consecutive year of recession.” Earlier we published this piece on Germany’s hidden recession. The Financial Times also sees an increased risk that the eurozone’s largest economy will again slip into recession. Industrial output has now fallen back to 2005 levels. The British paper calls the figures “unexpectedly poor,” especially the collapse in the auto sector.
Economists had not anticipated a 4.3% drop, expecting only 1%. “Industrial production is plunging like a stone,” wrote Carsten Brzeski, head of macroeconomics at ING, in a note to clients. Earlier this week, BMW issued a profit warning due to weak results in China. Mercedes-Benz and Porsche face the same problem.
Germany’s auto industry is in an existential crisis. The competitive position of German manufacturers is deteriorating — not only because of the rise of Chinese producers, but also due to the disappearance of cheap energy as the foundation of the German industrial model. Who would have thought that an industrial nation cannot run on wind turbines and solar panels?
As if Germany hadn’t received enough bad news, chemical giant Ineos announced this week that it will reduce production in the country. The affected plants produce raw materials used in the defence, automotive, renewable-energy, and pharmaceutical sectors. Again, high costs are the main reason. “Europe is committing industrial suicide,” said the CEO of Ineos Inovyn.
Politics finally seems to be waking up. Several Members of the European Parliament are opposing the ban on new combustion-engine cars. The Dutch Financieele Dagblad even reports that a majority now seems to want to scrap the ban altogether. An interesting detail: not only a Green-Left-Labour MEP, but also one from the liberal D66 party defended the ban.
Recommended reading: How suffocating labour laws are stifling European innovation.
Nik Storonsky, billionaire and co-founder of Revolut, has officially moved his residence from the United Kingdom to the United Arab Emirates. Although neither he nor Revolut have commented on the reason, many suspect the move is linked to high British taxes. Earlier this year we reported on the growing phenomenon of the “fleeing British millionaire.” Why is this so relevant?
Billionaire Nik Storonsky has left for the UAE – source: Financial Times
Thousands of millionaires are currently leaving the UK for the same reason. As a result, the British Treasury could lose up to £111 billion over the next decade. It shows that the so-called Laffer curve is not merely a theory but an economic reality: raising taxes does not automatically lead to higher tax revenues.
The explanation is simple: people adjust their behaviour. This summer, Finance Minister Rachel Reeves was confronted with that fact when tax revenues fell following a rise in capital-gains taxes. Governments cannot endlessly raise taxes while expecting prosperity to remain intact.
A crucial lesson for politicians in many Western countries, who are likely already on the wrong side of the Laffer curve and hope to close their budget deficits through higher taxes. The real solution must come from a smaller government budget — or from more debt and, ultimately, central-bank support. Which of the two is more likely, you may decide for yourself. But given the historic rise in the gold price and the growing popularity of the “debasement trade,” the market seems to have already made up its mind.
