Will Trump restore Europe’s appeal to investors?

The situation in Europe is decidedly bleak. Do they possess sufficient gravity? Investors are wagering that Trump’s policies will restore Europe’s attractiveness for investment. The elites convened in Davos expressed a rare consensus on the dire state of affairs, a stark contrast to their previous assertions of stability and prosperity. The interplay of President Trump’s tariff threats, the enthusiasm surrounding deregulation in the U.S., and prolonged economic stagnation have prompted European leaders to reconsider the wisdom of encumbering the region’s businesses with excessive regulation.
The challenge in Europe lies in the ability to effect meaningful change. Significant transformations often emerge in Europe primarily in response to crises, prompting influential leaders to amplify the prevailing sense of urgency. Christine Lagarde, President of the European Central Bank, addressed the World Economic Forum in a Swiss ski resort, characterizing the situation as “existential.” This is significant not only for the future of Europe but also for investors at large. A growing unease has emerged regarding the relative performance of U.S. markets in comparison to their global counterparts. There are those who argue that divergence cannot be maintained indefinitely, suggesting that international investments serve as a means to diversify risk.
Should Europe manage to alter its trajectory, it is likely to enhance growth and provide a lift to European equities, which, despite their impressive gains this year, have risen by merely 50% over the last ten years. This stands in contrast to the tripling of U.S. stocks. The challenge resides in persuading Europeans that their security is sufficiently at risk to warrant a compromise on their standard of living in favor of economic expansion.
“I fear that we are effectively regulating ourselves out of the competitive landscape,” remarked Niclas Mårtensson, CEO of Stena Line, the Swedish ferry operator. “A heightened sense of competition is emerging from the European perspective.” “We find ourselves frustrated with the pace of European regulation,” remarked Kasim Kutay, CEO of Novo Holdings, which oversees approximately $150 billion in assets for Denmark’s Novo Nordisk foundation. “A significant wave of innovation is unfolding in Europe; however, firms are increasingly relocating to the United States, drawn by the opportunities for product launches.” He remarked, “Progress is occurring at a painfully slow pace, and this is simply inadequate.”
The primary expectation is that Europe will accelerate the implementation of reforms outlined by Mario Draghi, the former president of the ECB and Italian prime minister, in a significant report released last year. A significant achievement would be the establishment of a capital markets union, effectively integrating the region’s financial markets by eliminating redundant country-specific regulations. These initiatives date back ten years; however, there has been minimal advancement. There is also a necessity for integrated energy systems and a more conducive environment for the advancement of artificial intelligence.
The current discourse has not centered on the outright elimination of regulations, but rather on a temporary cessation of their expansion. European leaders at Davos have engaged in discussions regarding the potential suspension of environmental reporting requirements, which are set to be implemented through three distinct and contradictory sets of regulations in the near future. “This is a test,” remarked a government minister engaged in the discussions to postpone the reporting directives. “Should they fail at this, one must question the prospects for success.”
Ursula von der Leyen, President of the European Commission, has tasked Valdis Dombrovskis, the former trade commissioner, with the responsibility of streamlining regulations. Trump’s push for deregulation could serve as the catalyst necessary to align the remaining leaders of Europe with his agenda. “A burning platform, a common enemy, it could help,” remarked Ronald Wuijster, CEO of APG Asset Management, overseeing €616 billion for Dutch pension funds.
Although it appeared at Davos that a significant portion of the governing elite understands the complexities at hand, it remains uncertain whether the electorate is prepared to embrace the necessary trade-offs. “I have doubts about whether the national politicians can effectively communicate this to the electorate,” remarked Yann Le Pallec, president of S&P Global Ratings based in Paris.
The challenges are numerous. Smaller nations are apprehensive about the potential loss of their stock exchanges, a probable consequence of integrated capital markets. Germany is opposed to the acquisition of Commerzbank by Italy’s UniCredit, highlighting the persistent challenges associated with cross-border bank mergers in various nations. Farmers in France and the Netherlands express strong opposition to free-trade agreements, including the recent treaties established with Mexico and the Mercosur bloc of Latin American countries, both of which await ratification by EU member states.
Philipp Hildebrand, vice chairman of BlackRock and a former head of the Swiss central bank, suggests that the current situation may resemble the early 1990s, a period marked by pressure on Europe following the collapse of the Soviet Union, which catalyzed expansion into Eastern Europe and the establishment of the Maastricht treaty that formed the EU. “The emphasis lies not in determining the course of action; Draghi has already articulated that.” “The issue at hand is one of execution,” he remarked.
In the intricate landscape of European politics, compromise serves as an essential element, and Beata Javorcik, the chief economist of the European Bank for Reconstruction and Development, perceives a glimmer of optimism for a potential new grand bargain. “Many decision makers are coming to understand that this is a critical juncture,” she stated. It may be that the most beneficial outcome for European equities is not necessarily an increase in growth—given that many large European firms derive a significant portion of their revenues from abroad—but rather a revitalization of unified capital markets that could awaken savers from their inertia and motivate them to embrace risk in the equity market.
It is difficult to envision European politicians breaking free from their complacency to embrace the risks associated with deregulation. However, should they choose to do so, the implications could be transformative for the continent and its financial markets.