Carsten Brzeski
Appearances
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
It was a very important election. As you know, we had a collapsed government before. That was the first time we actually had a three-party coalition in Germany. First time ever. Didn't make it till the end. So with these new elections and snap elections end of February, it was more or less...
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
The idea that this would be the last election, the last chance for the established political parties to show that they can really get the economy out of the current slump before maybe extreme parties to both the right and left wing of the political landscape would gain even more votes. When you look at the results then, what did we get? Yes, we had a winner.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
There was the Christian Democrat Party led by Friedrich Merz, but they hardly got 30% of the votes. I think the big surprise, no longer a surprise for Germans, but for international observers, was the second place for the Alternative for Deutschland. Far-right extreme party coming in with more than 20% of the votes.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And then we had the Social Democrats, the Greens, both in the former government party, they lost. The Liberals didn't even make it into parliament. And now we have a new parliament actually since this week, since 25th of March. in which we do have kind of the right-wing AFD probably being the largest opposition party.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And we have also the left-wing extreme, the left party, former Communist Party also being in parliament. So it is not as fragmented as other European parliaments are, but German politics has become more fragmented.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
I think at the elections there were three elements that were key. One is the economy. The German economy hadn't grown for five years in a row. We had the headlines that also big industrial companies in Germany had to lay off people. I think also all voters understood that there is something structurally at hand in the German economy, so that clearly played a role. People were looking for answers.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
That is one. Then we have the migration story, where also then over the winter period, we had more attacks by, well, migrants, former refugees. So really, how to integrate migrants into society has also been a big topic for these elections and clearly explained why the AFD gained so much support. And then the third point is more kind of general disappointment with established parties.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
This idea, the voters thinking, we had given them many chances to show that they are able to manage migration, that they are able to manage the economy. In the eyes of many voters, then established parties had not succeeded. So why don't we give other parties a chance? So I think this is clearly stepping away from more centrist parties, established parties,
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
clearly another reason why we had the support for both. And that's interesting, for both the AFD and the left extreme party.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
I always call them cyclical and structural issues. Cyclical issues, pandemic, even more war in Ukraine, energy crisis. So that clearly pushed down on industry, but also on economic activity in general. And don't forget that Germany had been highly depending on Russian oil and gas before that. So the energy price crisis was a big factor.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
Also, geopolitical tensions for an economy that is so depending on exports. But that's not all. I always love to look at these international competitiveness rankings. And there, Germany was in the top five 10 years ago, one of the most competitive economies in the world. Now, 10 years later, Germany is somewhere between number 20 or ranked 20 and 25. And what does this show?
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
This shows underinvestment, underinvestment in infrastructure, in digitalization, in education. So Germany has more or less forgotten to really innovate, to invest in the future. And this is what now all these things came together. Another important factor, but also only showing it is, the changing role of China over the last couple of years.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And I think electric vehicles is the best example, but there's more to it. That China is now able to produce the stuff that normally imported from Germany. So China has moved from being a very great, flourishing export market for the German industry to a rival. And then the German industry has not been able to face this competition.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
The German people clearly stood behind Ukraine and stood behind support for Ukraine. But don't forget that Germany was a split country with different cultural backgrounds, also with different historical backgrounds vis-à-vis Russia. But this war in Ukraine is only a few hundred kilometers away from Germany. So this is pretty close by.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And you had an interesting combination of still of fear from Russia, fear that the whole thing could escalate. I think Germany was not alone in 2022, which I think also made that the German government back then was also maybe too cautious and giving big support for Ukraine because there was always this fear of any nuclear or technical nuclear reaction by Russia. Thank you. Thank you. Thank you.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
Thank you. Thank you. Thank you.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
Thank you. production facilities on military equipment. But infrastructure spending is traditionally positive. But to be very blunt, does 500 billion Euro infrastructure spending in Germany now make that the German automotive industry will become more competitive again. Vis-a-vis China, no, not automatically. And this is why there is more needed than only fiscal spending.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And if we get this, what is more needed, and that is topics you all know, this is a bit like in the US, reduce bureaucracy, reduce regulation, but also invest in education. Also really decide and investigate which sectors are actually sources of growth over the next couple of years. In which sectors will Europe be able to compete with China, but also with the US?
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And I think this discussion has not really gained momentum yet in Europe. If it does, then I would become more optimistic and could even see a longer period of higher growth in Europe. But I'm not overly optimistic yet.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
that great. I'm a sell-side economist, so I will not give you any trading recommendations or any individual titles. But, Scott, let me just start a bit longer, because you're fully right. This is Risk aversion, I think, is one of the more general explanations. And I lived abroad for a long while and then came back to Germany 11 years ago.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And then you come to your own country, but with a fresh pair of eyes. And what I noticed in the very, very first day, so you go to a grocery store and then, you know, you have this kind of elevator music in the background, plus some commercials. And these commercials were about what? You know, security stockings and insurances.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
So, and this was already, you know, somehow telling that, you know, we are not a... risk-loving culture. We are risk-averse. And this applies to actually most of Europe.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
I would argue this is also one of the biggest reasons why we, for example, need a capital markets union, a European capital markets union, which could then also not only change cultural risk behavior, but would also allow us that we really have kind of private risk capital. So when you look to tech companies, to startups in general, it is very hard in Europe to get funding.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And this is why they very often then move to the U.S. And we do have many smart people. We do have very good universities at clearly much lower tuition than in the U.S. But when these smart people then develop something... They hardly ever end up in Europe because they are either not supported by the university or the surroundings. They don't find that there is capital, so they move on.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
Turning to Germany and tech, We had over the last couple of years clearly some very interesting fintechs coming out of Germany. As I said, sell-side economists, I won't mention any names, but there is clearly something going on. We also had in Berlin, for example, a very good sound startup community. So that is also something that has clearly been happening.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
regulation, access to capital is probably the biggest hurdles in Germany and in Europe to make any startup, including the tech companies, really successful. And this is why, Ed, you mentioned You know, one of our champion league players in Germany. And you also know when they were founded. So I think they are more or less my age. So this is no longer a young startup.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
We are coming from behind now. Compared with the US, compared with China. And you're fully right, Scott, that it looks as if China took over the European position. But I think that Europe has understood. So an important milestone was this report by Mario Draghi last fall, an important one. Germany's fiscal U-turn now is another important one. Europe never moves extremely fast, but it moves.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
And if Europe now really starts to reduce bureaucracy, regulation, provides better access to risk capital, I'm still positive that we could see some new unicorns coming out of Europe.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
They will clearly be impactful. Germany... exports, I think, 150 billion euro per year to the US. So if we were to see 20-25% tariffs, obviously, this is going to hit German and European exporters. To determine the full magnitude is, in my view, impossible because we simply don't know the price elasticity. I think someone being able to afford A luxury German car in the U.S.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
will also be able to pay 20% more on that. But it's going to hurt. And that is, I think, the important one. It's going to hurt a still hardly growing economy.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
You know what, to me, even more than only tariffs, the biggest risk for Europe is that if the US administration was also to deliver the tax policies that are in the plans, so if the US administration really manages to make the US economy more attractive, then tariffs are
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
are not only about this kind of short-term shock or negative impact on Europe, but they are rather they stick to relocate production out of Europe to the US. And I think that is, to me, from a European point of view, the biggest risk for Europe. And the even more interesting thing right now is that we will have And that is the challenging thing for economists these days.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
How do you forecast the whole thing? We have two extremely opposing drivers. We have the looming tariffs that are clearly Euro-negative, and we have the fiscal packages and defense spending that are Euro-positive. How do you make a reasonable growth forecast right now? Extremely hard.
Prof G Markets
Unpacking Germany’s Historic U-Turn on Spending — ft. Carsten Brzeski
Thank you, Karsten. Thanks for inviting me.