March 2020

CIO LETTER

Thomas Friedberger CEO and Co-CIO, Tikehau IM

Europe : The Final Countdown Thousands of works have been published on Europe, its history, geography, economy and cultures. It would of course be impossible to summarise all the writings and reflections ever shared on the dynamics driving the Old Conti- nent. But, at a time when global growth now only counts very partially on Eu- rope’s contribution, when the centres of technological innovation and economic growth inevitably appear to be focused on the US and Asia, we nevertheless find it important to at least try to understand these dynamics. First of all, 1 because Europe is still, even today, the No. 1 trade zone in the world 1 . Second, The 28 EU Member States represented because in recent centuries, conflicts staged in Europe have often had world- 5% of the global trade wide repercussions. But also because it is probably the most difficult major of goods in 2018. Source : Eurostat economic block to grasp, which not only partially explains its weaknesses but also creates strong barriers to entry and large-scale opportunities for potential investors. Finally, because it is the geographic area in which Tikehau Capital predominantly invests at this point in its development, and it is thus important to establish a view of the main trends in the region, which remains to this day one of the only major alternatives to the Americas

Accordingly, this quarter we decided to take a look at the dynamics of Europe, the continent that shaped the global economy in its image after dominating the world from the Renaissance to World War I, and whose decline since the end of World War II seems to be gathering pace in the 21st century with the emerging rivalry between the US and China for global economic and mone- tary dominance. As usual, we will attempt to shed light on this analysis from a historical and geographic standpoint, all the more debate-worthy perhaps in that European current events necessarily call up political interpretations. Also as usual, we will attempt to steer clear of any ideological or political considerations because that is not our calling. Instead, we will remain focused on an analysis aimed at establishing a framework for our policy governing CIO LETTER

The first question we can ask ourselves is: investments in this fascinating why did European civilisations continent, bursting at the seams win out over others through with value for those capable of conquest and colonisation, aligning their investments with each country’s specific charac- ultimately succeeding teristics and decoding the extra- in dominating the world after ordinary complexity stemming the Renaissance? from its very rich history. We can probably rule out random luck if we ap- 2 proach the question from a geographic standpoint 2 . Guns, Germs and Steel Jared Diamond, 2017 In prehistoric times, the development of farming can be traced to the Fertile Crescent and China, which 3 boasted temperate climates and varying altitudes Prisoners of Geography conducive to the growth of multiple species of flora 2 Tim Marshall, 2015 and fauna. There are other “Mediterranean”-type cli- mates in the world, such as Australia and Chile, but they are more geographically restricted. Also, the Eurasian region offers the greatest weather varia- tions between seasons, leading to a wide variety of perennial plants which are ideal for crops. In addi- tion, the Fertile Crescent is the only zone boasting such a large number of domesticable animals such as cows, pigs, sheep and goats, which is why ani- mal husbandry appeared in Eurasia well before other regions. The proximity of animals also allowed the re- gional population to develop resilience to viruses and diseases transmissible from animals to man, unlike other populations, which later played a role when Eu- ropeans came into contact with other peoples during the discovery of the New World and colonisation. nother factor explaining the development of Eurasian power was the continent’s enviable Ageographic position, as the largest block of land on Earth hosting the largest number of societies in competition and especially given its east-west orien- tation, as opposed to the American and African conti- nents lying predominantly on a north-south axis 3 . This unique set of circumstances paved the way for farming and innovation to expand more rapidly in Eurasia than in other regions in the prehistoric era, because this east-west orientation guaranteed a uni- formity of climates that facilitated travel as well as the transmission and transposition of farming techniques. Days were roughly the same length across the conti- nent, and seasonal variations relatively comparable. Eurasia’s broadly similar climates also meant the diseases found in its countries were broadly simi- lar. The vastly different latitudes in the Americas and Africa created natural barriers not only So, we have just established how the geographic to travel (e.g. Sahara Desert, tropical situation of Europe on the world’s only east-west forests), but also to the propagation oriented continent - Eurasia - meant that Europe was of farming techniques, which were able to impose its culture on the world, including necessarily highly specific to each cli- the most advanced civilisations, and not vice-versa: mate. These climate and ecological rapid development of farming techniques, propaga- barriers also slowed the dissemination tion of technological innovation, and immunity against of technologies, whereas the relative zoonotic diseases that would later decimate conque- ease of east-west travel was at least red populations. partially responsible for the speed at which technological innovation tra- But then why were China and velled at the time. For example, the wheel, invented around 3400 B.C. in other Asian civilisations, also the Black Sea region, was found just present on the continent, unable a few centuries later in a large part of Europe and Asia, brought to the to prevail over Europeans? different populations through wars, spying expeditions, immigration and After all, the Chinese, Mongol and Persian civilisa- peaceful trade. It was Eurasia that saw tions also had their heyday before the “globalisation” 4 the fastest technological development ushered in by the discovery of the New World. In his book The Rise and Fall of the Great Powers 4 , Paul The Rise and Fall of because its societies accumulated not the Great Powers, 3 only their own inventions but those of Kennedy draws on an analysis of the different forces Paul Kennedy, 1989 other peoples as well. Medieval Islam, present at the start of the 16th century, which most for example, inherited inventions from historians agree marks the beginning of the modern India and China conveyed on the Silk era, to try to explain how Europe was able to take ad- Road, not to mention from Ancient vantage at that time and dominate all other empires. Greece. Around 1500, the largest centres of power were the China of the Ming Dynasty, the Ottoman Empire, the Mughal Empire in India, Moscow, the Japan of the Shogunate, and the group of States comprising cen- It was subsequently tral and western Europe. Aside from the latter group, the propagation of all other powers were centralised to the extent that power called for the uniformity of beliefs and practices writing that spurred the in terms of religion, trade or weaponry. The isolation of the elite, conservatism and repression against any more rapid development non-centralised initiatives ended up costing these of Eurasian civilisations. empires when it came to innovation. Compared to these great eastern empires described by travel- lers as overflowing with riches and a certain military power that Europe was able to personally attest to Interestingly, though, the primary objec- several times, including in 1453 during the conquest tive of writing was to keep accounts of of Constantinople by the Ottomans, Europe looked farming production. Tribes of hunter- positively fragmented. It was competition between gatherers had no concept of storage, the different kingdoms, accentuated by the religious and thus had no need for writing. From diversity conveyed by the Lutheran Reformation, crop storage arose writing, and from that stimulated innovation and the spirit of enterprise writing the much faster transmission which in turn steered the region into a virtuous circle of information between regions and of economic growth and military progress, making it generations, thus cementing the foun- possible to colonise the world. dations of the European power that would later be unleashed on the world from the Renaissance onward. CIO LETTER

The fall of the Roman Empire with the ater, by pillaging the riches of the New World, abdication of its last emperor in 476 Europe developed a financial power that it would sounded the death knell for European L put towards military innovation. The printing unity: it was the last time the peoples press not only allowed for better circulation of infor- of Europe would be able to come to- mation, but also the exportation of germs to which gether. Whereas China for example in the Europeans had built up immunity by domesti- the Middle Ages presented an unde- cating animals early on, thus accelerating Europe’s niable cultural unity, Europe had to world domination. On the weapons front, the advent deal with a balance between national powers that fluctuated to the tune of of broadside-canon wielding high-seas sailing ships wars and alliances. Such a precarious and musket firearms likely made a crucial difference balance maintained the competition to European colonisation and the domination of eas- that preserved a certain emulation in tern empires in the race to secure a global hegemony. military and civilian technological in- Tales of naval battles between Europeans (notably novation alike. Thus, China launched Portuguese) and Muslims off the African coasts or naval expeditions embarking on the in the Straits of Hormuz and Malacca speak to this discovery of the New World roughly 80 imbalance of forces and the crushing defeat of any years before the European conquis- resistance by Europe with its mighty weapons. The tadors. And yet, it abandoned these expeditions to refocus on its domes- European military machine would go on to trigger the 4 tic economy. Similarly, Japan aban- acceleration of technological progress in metalworks, doned the development of firearms mining exploration, agriculture, cartography, naviga- for cultural reasons of nobility asso- tion, public works, medicine, astronomy and physics. ciated with sword fighting, despite innovation having reached the country. Europe was thus able to impose its cultures and eco- nomic models on the world by rapidly spreading inno- vation and stimulating competition between neigh- In Europe, bouring powers. competition and the Then why was Europe never threat of neighbouring again able to find unity after the cultures paved the way fall of Rome? for the expansion of Charlemagne, Charles Quint and new technologies Napoleon all failed in their quest in the Middle Ages for European domination. and Renaissance. Why is that? Let’s start with a geographic reason: unlike North 5 America 5 , Europe’s major rivers are not interconnec- The Mississippi River Network is the largest ted, meaning riverways became first natural and then network of inland waterways administrative borders between peoples. The Roman in the world, connecting conquests encountered the geographic barriers of the Great Lakes to the Rhine, which Caesar twice failed to cross, then the Atlantic Ocean. the Elbe which marked the border of the Roman Em- pire under Augusta. While northern Europe is a vast plain interspersed with rivers flowing from western France to the Ural Mountains, southern Europe is less consistent and is cut off from the north by mountain barriers formed by the Alps, Pyrenees and Carpathian ranges. n The Shortest History of Germany, Peace of Westphalia in 1648 as a breakthrough event James Hawes describes the origins in the history of Europe and the world. After seve- I of trading between the Germanic ral decades of conflict, France and Sweden agreed peoples and Rome starting in 150 to negotiate with the Germanic Holy Roman Empire. 6 B.C. . In all Germanic languages, The treaty established the State, and not the church, 6 the word “purchase” comes from the empire or dynasty, as central to European order, thus The Shortest 7 Roman word “caupo” . “Shopping” the concept of the sovereign State was born. The History of Germany is another example. The Germanic treaty recognised the right of each signatory to have James Hawes, 2017 peoples withstood the decline of Rome its own internal organisation and religious orientation. thanks to their skill in trading with the It even included clauses stipulating that minority reli- 7 peoples of northern Europe, thus de- gions were allowed to practice their faith in peace. Kaupa, kopen, shopping, veloping a double Germanic/Roman In so doing, the Peace of Westphalia laid down the kaufen - the root word for all these terms culture. The Goths were the first Ger- principles for a system of international relations based is “caupo” manic tribes to convert to Catholicism, on mutual recognition of sovereign States governed and their cousins the Franks were by rules and limits, rather than on the domination 8 the first bicultural Germanic/Roman of a single country. The Westphalian order is cha- The term “First Reich” evokes people. The coronation of Clovis in racterised by the plurality of sub-orders. From that the first Nation State 481 and his conversion to Christianity point on, the Catholic church lost all legitimacy in in the history of Germany marked the beginning of the Mero- any form of quest to unify Europe through the defeat vingian and then Carolingian dynas- of Protestantism. On the diplomatic front, the treaty 9 World Order ties, bolstered by Germanic military ruled out any reunification of Europe on a religious 5 Henry Kissinger, 1979 power and the alliance with the Roman basis, meaning any such unity would only be pos- Church. Paradoxically, the coronation sible through military force. Napoleon would be the of Charlemagne as Roman Emperor first European sovereign to attempt unification wit- with the blessing of Pope Leon III in hout claiming the legitimacy of the Roman church. He 800 marked both the ascension of a crowned himself emperor, rejecting the consecration Germanic king to the Roman throne of the Church which had allowed Charlemagne and and the decline of Germanic culture, Charles Quint to lay claim to leadership of Europe. with the empire being administered in Latin and governed by Roman rules. However, Charlemagne failed to unify Yet another reason for the fai- Europe and, after his death, the empire was quickly divided, never again to be lure of any attempt to unify Europe united. Thus the Rhine was definitively established as the border between was the increasingly prohibitive France and the Germanic peoples. At cost of maintaining a military power the end of the 5th century, the region demarcated by the Rhine, Elbe and Da- capable of dominating the entire nube rivers, was ruled for the first time by a single emperor, Otto, considered continent. the first sovereign of Germany defined as a gathering of Germanic peoples 8 . Even with the support of the Roman church, no sovereign was ever able to From the Renaissance onward, Europe began syste- reunify Europe. matically entering into alliances with the majority of States and kingdoms against the dominant power nd, as it happens, the second at the time. Thus, the Germanic Holy Roman Empire reason for the failure of any at- under the House of Hapsburg extended from South A tempt at European unification America to Germany and was described in the early lies in the emergence of Protestantism, 16th century as “the empire on which the sun ne- which spread rapidly in Europe once ver sets.” Due to the threat represented by this em- the printing press arrived on the scene. pire under the reign of Charles Quint, other powers In World Order 9 , former Secretary of were determined to step up their efforts to limit his State under Richard Nixon, Henry Kis- influence. By spending time fighting too many ene- singer, stressed the importance of the mies to keep their empire, the Hapsburgs ruined their CIO LETTER

economy. The rising cost of war gene- apoleon suffered the same fate as the Haps- rated inflation that proved fatal to the burgs when the kingdoms of Europe joined Holy Empire. Between 1500 and 1630, N forces against him, simultaneously taking food prices in Hapsburg Spain soared down the French military machine and economy. five-fold, and manufacturing prices Which leads to the third reason for the impossibility of tripled 9 , putting a huge dent in the European unity: the presence of England as an island public purse and forcing the empire country and of Russia, spanning two continents but to fight to maintain solvency by taking truly integrated with neither. Russia: impossible to on massive debt. Military competi- conquer and happy to dig graves for its attackers in tion between European States made winter. Charles XII of Sweden failed in his attempt, it prohibitively expensive to finance followed by Napoleon and Hitler. Meanwhile, England a system capable of conquering all was able to keep its influence and protect its inte- of Europe. Thus began the era of big rests by switching alliances as needed to maintain the bankers, which ultimately saw the balance of forces on the continent to ensure that no 10 Central Banks created by the sove- given power would triumph. GIUK : Greenland, Iceland, reign States to keep control over the United Kingdom. Imaginary Historically, England has always sought to maintain monetary system and the financing line traced on the North a divided Europe by weakening the dominant power of wars. Well after the abdication of Atlantic maps to represent on the continent in order to better ensure its own Charles Quint, Cardinal Richelieu kept the naval choke point for influence, establish its naval and thus commercial 6 up the effort to weaken the Hapsburg any ship trying to enter the domination, and defend its interests. It succeeded in Empire insofar as this strategic goal Atlantic from the north. keeping this principle over the long term by drawing saw the division of central Europe, i.e. The other route on the power of its colonial empire, now the Com- is the English Channel, the equivalent of the current territories monwealth, to serve as a counterweight on the conti- which is narrower and also of Germany, Austria and northern Italy, nent. Henry Kissinger compared England’s role in controlled by England. as a political and military necessity. Europe until World War I with that of the United States Accordingly, the ultra-Catholic France, in the world after World War II: ensuring a certain ba- through the actions of the ultra-Catho- lance of power with the aim of protecting its own eco- lic Cardinal Richelieu, had absolutely nomic and strategic interests. Napoleon is quoted as no problem supporting a Protestant saying “Antwerp is a loaded gun pointed at the heart coalition comprised of Prussia, Swe- of England”, tidily summing up the threat that a united den and the kingdoms of northern continental power represented for England, lying right Germany against the ultra-Catholic at its strategic doorstep. The United Kingdom has Hapsburgs, because the main threat thus always sought to dominate the European seas, looming over France was not religious while ensuring that no major economic power on the but rather the unity of central Europe. continent controls the Port of Antwerp and Belgium. From that point on, France was forced When the EU was formed in 1973, the UK used the to maintain a divided Germanic zone, opportunity to make the Union a vast free-trade area and succeeded until Von Bismarck rather than an integrated political block. united the German states. And, even more recently, the reunification of It should be noted that England’s geographic loca- Germany in 1990 was only ac- tion is decidedly a weakness that has encouraged it cepted by François Mitterrand to uphold division on the continent, but also repre- if the united Germany would sents a considerable strategic advantage. The infa- give up the Deutsche Mark mous GIUK gap 10 secured control for the British navy for the Euro. over any attempted intrusion into the Atlantic from the north. With the British also controlling access to the Mediterranean Sea via Gibraltar, the only three countries able to access the Atlantic without being blocked by the Royal Navy are Spain, Portugal and France. It is also worth noting that an independent Scotland also becoming a member of the European Union post-Brexit would n summary, the unity of Europe after the fall of deprive the UK of this highly strategic Rome, which already had multiple geographic advantage of controlling the GIUK gap. factors stacked against it, was made impossible With Brexit, the UK is taking the risk I of changing the stakes in such a way when the Catholic Church lost its legitimacy as that could weaken its influence, should a federating agent after the Protestant Reforma- the Franco-German partnership gain tion. This was followed by the twin undermining new momentum and the UK economy efforts of France to systematically weaken Ger- not do significantly better than the EU manic central Europe and England to weaken any economy now that Brexit is a reality. Conversely, a sound-as-a-pound UK dominant power on the continent (starting with economy would take the shine off the France). Despite 60 years of European construc- apple of belonging to the Union, and tion, the traces of these strategic dynamics can would probably start other countries still be seen. thinking about leaving if the Union were unable to restore growth. From that standpoint, the UK is likely to use its The evolution of Europe has thus always centred on a command of the English language and shifting balance between regional powers, a balance the superiority of UK law in business dictated by armed conflicts that ended up weake- 7 matters to secure the economic and ning Europe against the United States, the emerging fiscal resources needed to hold on to power of the 19th century which then dominated the its economic, and especially financial, 20th century thanks in part to the security afforded by influence in Europe. And the weakness its natural ocean barriers. of the moderate majorities in power in France and Germany makes it more Unlike Europe, the United States rapidly integrated difficult to breathe life back into the the concept of national unity around the War of Inde- Franco-German partnership in favour pendence, marred only by a brief civil war (the War of building up Europe, leaving the door of Secession from 1861 to 1865). As for China, the wide open for the UK to make some unity of the people is rooted in its ancestral culture choice moves on the chessboard of and glorious past as the world’s greatest empire in Europe, provided the kingdom ma- its day. For some Chinese, the unity of the people is nages to stay united... more important than individual freedoms, which legiti- mises China’s position regarding Taiwan and explains its position against the protest in Hong Kong. or its part, Europe has not known unity since the fall of the Roman Empire. After World War II F ended, the idea of a unified Europe was based not on a feeling of belonging to a common culture, like the United States or China, but on the fear of seeing history repeat itself after two wars that brought the continent to its knees. To that end, the European Union has been a success in staving off war, but for now the European identity looks like a sweet utopia and will probably be very complicated to instil in the cultural mindset. CIO LETTER

From that standpoint, analysing the dynamics of the infamous Franco-German partnership is an interesting ocated at the centre of Europe, Germany’s exercise. history has shaped continental dynamics and In his book Prisoners of Geography 3 , L constantly influenced the balance of powers. Tim Marshall explains that, from the The translation of the Bible into German by Martin fall of the Roman Empire to the uni- Luther marked a turning point in German history. The fication of Germany, France was the Reformation was adopted by the Teutonic Knights most likely country to benefit from the and backed by the Duke of Prussia, who no longer geography of continental Europe. En- recognised the authority of the Pope when he pro- joying coastal plains ideal for farming, claimed himself “Protestant”. On 10 April 1525, this with the benefit of two natural barriers small eastern religion on the other side of the Elbe in the Pyrenees and Alps mountain River made its mark on history by becoming the first ranges, far enough from the Russian Germanic religion since Charlemagne to reject an al- and Moghul empires to avoid the legiance to Rome. Prussia and Protestantism arose reach of their military powers, France together, in defiance of the western Roman church, also shares the natural border of the and Germany’s destiny would forever be tied to a 8 Channel with England. Such a favou- balance between west Catholic Germans and Pro- rable environment enabled France to testant Prussians. We saw the Peace of Westphalia develop its influence in Europe until a validate Prussia’s position by recognising religious Germanic power arose. A strong Ger- diversity in Europe, at the same time killing any hope many, first within the Germanic Roman of unification in the name of religion. From that point Empire and then unified at the end on, German history revolved around a rivalry between of the 20th century, brought an Protestant Prussians and Catholic Germans, ultima- end to the dream of French tely decided by the Austro-Hungarian Empire which domination in continen- played the balance-of-power role in the 19th century tal Europe. until it was humiliated by Bismarck’s Prussia in Sa- dowa come 1866. It was that Prussia in which the Protestant Victorian England found an ally driven by the ideal of restoring the Germanic Empire, recounted by Hegel in his writings as a colonial and maritime force. Albert de Saxe-Coburg, the German husband of Queen Victoria, even considered unifying Germany, in his “Coburg Plan”, around a Prussia liberalised in accordance with British principles. It was this growing Prussian prestige, centred on a military tradition inte- rwoven throughout the political and economic fabric, that drove the smaller kingdoms of southern Germany to be tempted by the idea of a second Reich embo- died by Bismarck and his Prussian Junckers. On 10 December 1870, the North German Confederation, led by the King of Prussia, left the southern kingdoms little choice and led a war against France right up to the gates of Paris. The Prussian-dominant German Empire occupied the Germanic area spreading from Rome via the Rhine, Danube and Elbe Rivers and even beyond to the Odder, in Denmark and Alsace- Lorraine, until 1914. As we approach the quarter-century mark, what are the main challenges Europe must overcome to continue tarting in the 1950s, the econo- existing in the 21st century on equal mic and demographic weight of footing with the two global S these two countries made Fran- co-German relations a key cog of the heavyweights? European machine. It is when both It is a Europe that lost control of globalisation in the countries enjoy a highly legitimate go- 20th century that must now confront the challenges vernment at the same time that Euro- of the 21st century, against two more consistent eco- pean construction can move forward. nomic and monetary blocks: the United States and The reunification of Germany in 1990 China. Faced with these two giants, Europe must find and the subsequent reforms, coupled a path to reinventing itself without seeking a direct with the creation of the single cur- confrontation, probably by taking the “create, don’t compete” approach. . rency, altered the economic balance between the two countries and giving f the three major economic blocks, Europe is the advantage to Germany as the dri- nowhere near being the most dependent on 9 ver of the European economy. German O exports. There is good reason for this: while industry benefited from reunification by US and Chinese corporations are able to develop on a vast and uniform market, European corpora- relocating production in the east for tions have to fight to expand in the euro zone out- cost optimisation purposes. With the side their country of origin. This is probably one of wage sacrifices of the 2000s, Germany the reasons Europe has no major tech champions. was fully poised as one of the countries Amazon, Google, Tencent and Alibaba had access to (alongside South Korean and Australia) gigantic domestic data markets. The Spanish coun- ready to capture the rapid expansion of terpart to these corporations, however, cannot easily Chinese economic investments in ma- access German or Italian data. In some sectors such chine tools, capital goods, chemicals as transportation, European institutions also consi- and the automotive sector from the dered the emergence of European champions as a threat to competition. European champions turned 2000s onward. The competitiveness to exports without enjoying a strong domestic base of the German economy, and its ties on the continent. European, and especially German, with Chinese industrial development, industry is thus particularly dependent on the Chinese finished shifting the balance of Fran- economy. The problem is, China wants to develop its co-German relations in favour of Ber- domestic market with its own local champions. The lin, despite the creation of the single emergence of Chinese competitors in the automotive currency on which France insisted in or chemicals sectors is an impediment to German exchange for accepting reunification. growth. That being the case, Europe is probably the economic area with the most to lose from the trade tensions between the US and China. However, a compromise on that front is unlikely to change much in the grand scheme of things: China, a new strate- gic power and soon to be the No. 1 economy in the world, is looking to shatter the dollar’s monopoly as the sole reserve currency by offering its trade partners its own currency as an alternative for trading and even leveraging purposes. Massive infrastructure plans like the “One Belt One Road” initiative are a way for China and the international institutions it has set up (Asian Infrastructure Investment Bank, Chinese Develop- ment Bank and Exim Bank) to offer financing solu- CIO LETTER

11 tions denominated in renminbi 11 . The Tikehau CIO Letter launch of future oil and gold contracts Are US-China trade in CNY raises the possibility of the US In order to reinvent tensions just the tip losing influence in controlling its trade itself, Europe will probably also of the iceberg hiding partners, and could threaten the US much deeper issues? practice of using the dollar as a stra- have to rethink the way economic September 2018 tegic weapon in its international policy. Faced with these dynamics, Europe is risk-takers are perceived on the defensive, and has been unable and rewarded. to impose the euro as an alternative. On the contrary in fact. European This is one of the big differences between Europe countries accept Chinese financing and the United States, where successful entrepre- solutions which, amid rising protec- neurs benefit not only from a more favourable tax and tionist and nationalist movements, economic environment in terms of financing at each are liable to extensively alter relations stage in the company’s development, but also from a between these countries and the Euro- much more positive public image. Restoring the pres- pean Union. So, if the premise that the tige of starting and operating a successful business globalisation of the economy peaked in 10 is a sizeable but necessary challenge if Europe wants the 2010s is credible, what effect does to maintain its highly talented ecosystem and create that have on the multiple that investors jobs on the Old Continent. It also needs to curb should agree to pay to gain exposure the migration of entrepreneurial talent to the United to a predominantly exporting European States or Asia. corporation? nother structural problem for Europe in the 21st century is the lack of a budget union. The single A currency was launched in exchange for France agreeing to the reunification of Germany in 1990. To- day, the euro zone is penalised by the lack of a single EU fiscal and budget policy. 17 budgets with one cur- rency alter the balances between structurally different economies. Germany proved more disciplined than its partners, taking advantage of the situation by ex- porting products from its newly restored competitive industry to its European partners thanks to the inte- gration of the former German Democratic Republic in 1990, which allowed manufacturers to use a com- petitive local workforce, then to the sacrifices made by German workers in 2005 when the Hartz reforms were adopted and later in 2009 during the economic crisis. German workers at the time made the choice to work in exchange for wage concessions in order to keep the unemployment rate low. The German eco- nomy succeeded in benefiting from the single market within a euro zone where other economies were much less competitive. Consequently, Germany was able to export its unemployment to other countries in the region. As the European population grows older, economic considerations are also connected with migration patterns. Philosophically open to the world, geogra- phically more exposed to massive immigration waves from developing countries than China or the United States, the European States compri- policy while the economic cycle is showing signs of sing the Schengen area are currently flagging, running the risk of having no more leeway struggling to deal with the waves of mi- to adjust its monetary policy to combat a recession. grants from Asia and Africa, exacerba- Purchasing bonds issued by corporates gives the ted by neighbouring military conflicts, ECB a pro-cyclical aspect that could end up exerting extreme weather events and religious pressure on the bank in its role as a counter-cycli- persecution. Can the spirit in which cal player during economic contractions. European Schengen was created hold up in central bankers were alone in facing the euro crisis these new circumstances? The conse- in 2011, with the governments often having taken quences in terms of labour, inflation, advantage of low interest rates to issue more debt. extremist voting and religious conflicts Hence the ECB’s appeal to euro zone governments in secular States are enormous. The to take over the budget aspects of monetary policy. US and China have adopted positions To that end, the energy transition could give Germany as straightforward as they are radi- the opportunity to work around the budget discipline cal on these immigration issues. Can set out in its constitution to finance the investments Europe do the same? Is that even the necessary to meet this environmental imperative. right solution? For Europe, the situa- However, another threat liable to compromise this tion is as philosophical as it is econo- European budgetary effort is the emergence of popu- 11 mic. list governments in Europe. he state of the European ban- king sector is also a source T of weakness for the region. In The ultimate challenge summer 2019, the market cap of the Euro Stoxx Banks index, covering the facing European organisations 12 29 principal banks in the euro zone , 12 barely exceeded the market cap of lies in the perception of Eurostoxx Bank Index Nestlé alone. Not only did US banks European institutions both (SX7E) had a market cap rebuild their capital faster than their of €478 billion at end-No- European counterparts after the 2008 within and outside vember 2019, but around financial crisis, they also benefited €380 billion in August 2019 from more flexible regulations and the the Union. versus around €340 billion fragmentation of the European domes- for Nestlé (NESN SW) tic market, making it easier for them https://www.stoxx.com/ to compete with local banks in each document/Bookmarks/Cur- country. At the same time, European rentFactsheets/SX7GT.pdf) banks, too weak on the US market to survive there after the crisis, enabled their US counterparts to restore their profit margins across the pond on what had become an oligopolistic market. The state of the Italian banking sector is probably one of the reasons that the European Central Bank extended its ultra-accommodative monetary policy. Meanwhile, the German banking indus- try is dealing with regional fragmenta- tion that is preventing national banks for restoring acceptable levels of profi- tability. Euro zone banks were saved in 2011 by the imposition of drastic aus- terity measures on Greece. As a result, the ECB is stuck in its low interest rate CIO LETTER

collapsing the credibility of the Euro- pean Union. The conditions of Brexit are thus absolutely critical to the EU’s e have seen that geographic and cultural survival, in that it is vital that belonging considerations made it especially tricky to to the European Union or the euro zone W entertain any hope of turning Europe into not be perceived as a slippery slope a united cultural block as well as a global military to losing economic value and suppor- power. France and the United Kingdom prefer their ting an oligarchy to the detriment of its military independence, Germany steers clear of such constituent populations. issues, and the geopolitical interests of new eastern Member States sometimes differ from those of his- nother example: in 2011, the toric Union members. The ultimate demonstration of exposure of European banks Europe’s ineffectual military power came between A to Greek debt - in addition to 1991 and 1999 during the Yugoslav Wars, right at Italian, Spanish and Portuguese debt the EU’s doorstep but calling for US air support - inflicted greater losses on these to put an end to a diplomatic fiasco. Economically banks than if the European Union had speaking, the countries of Europe are still relying on let Greece default on its debt. We their former colonial empires, more or less success- are not taking a position here on the fully, but in any event with asserted independence. legitimacy of the European approach And initially established institutions, unelected except at the time. We are only interested for the European Parliament, based on the consen- in the perception that it generated. sus culture, technocratic and open to the influence Outside the European Union, Iceland of lobbies, show their limitations in a system made made the opposite choice to protect up of 27 countries. With national politicians laying 12 its population over the banks that had the blame on Europe for problems for which they do financed the excesses of the local eco- not want to assume responsibility, Europe is being nomy. In response, major international rejected by its own citizens who are convinced that banks, which had to write off substan- regional officials who resemble them more closely do tial losses, threatened to blacklist Ice- more to protect them. The return of regionalism in land from the capital markets forever. Europe can probable be traced to the failure of Euro- A few years later, however, the robust pean institutions, too far removed from realities on the growth of the Icelandic economy pa- ground, combined with an educational deficit on the ved the way for the country’s trium- part of national political parties which have tended phant return to the capital markets. If it to see Brussels as a very handy scapegoat. It has wants to endure, the European Union got to the point where, for many European citizens, will have to strike the right balance Europe has become the “Other” with a capital “O”, between the interests of the people the stranger, even the monster in the etymological and the interests of the elite. Although sense of the word (something we point to or show lessons were probably learnt from the because it is different from us) and protectionism, Greek debt crisis, it is not easy to draw regionalism or nationalism is the solution adopted by a comparison with Iceland. those who choose to band together with others like them, who understand them. Voting for parties that advocate these values has morphed in the 21st cen- tury, in that it is no longer about regions plagued by unemployment and insecurity. It has now spread to regions with full employment, such as northern Italy or Bavaria, where the middle classes have seen their purchasing power decline despite the lack of unem- ployment. We have absolutely no intention of taking a political position of any kind in this document. That is not our role. We can, however, question the end purpose of regionalist initiatives in a world economi- cally dominated by two uniform blocks: the United States and China. How much power would a Scottish or Catalan delegation realistically have negotiating a trade agreement in Washington or Beijing? In spite of it all, Europe is still an essential land of opportunity for global investors. Despite all the challenges facing the Old Continent in the 21st century, Europe is still a unique land of invest- ment that continues to attract capital from all over the world. First, because it is one of the most stable zones of Europe, you have to be local, meaning you have to be peace on the planet, magnifying the fully integrated in the national - or regional - econo- success of the Union from that stand- mic ecosystems and seen as a local investor, which point. Second, because the culture of automatically erects a very strong barrier to entry and investment and entrepreneurship are gives a competitive edge to those in the know. both extensive and maintained by a rich history and top-tier education sys- tem. Young European graduates, often well trained and speaking multiple The pay-off is worth it, insofar 13 languages, make valued employees as this complexity explains in part why around the world. The legal systems governing economic flows are stable. market multiples are lower in Europe for Lastly, to this day Europe is one of listed and unlisted companies of equiva- the only alternatives for global inves- lent quality as their US rivals. tors interested in investing substantial amounts of capital while diversifying Due to the lack of a uniform domestic market, fast- their portfolio outside the US alone. growing European companies tend to rely on mino- Right now, given the abundance of rity private equity. Bringing in a partner capable of global savings, this criterion is crucial supporting a national champion in its international and has made Europe a must for in- development strategy is an alternative that hundreds vestors. of mid-sized players can consider. Succeeding in that strategy calls for a detailed understanding of national That said, we have seen that Europe and regional ecosystems, as well as a network made is a complex economic area with up of the right partners and intermediaries. strong regional and national defining characteristics. It is very complicated hose wanting to invest their money in Europe for investors with no presence on the are very likely to struggle for some time with its continent, or content with a single Eu- T diversity of cultures and specific economic cha- ropean office in London, Frankfurt or racteristics. That is where we have a unique strategic Paris, to invest well in Europe. When edge, as we see it. But this fertile ground of expertise, people ask us why Tikehau has thus enjoying a supportive legal and cultural framework, far opened offices in seven countries can only last if Europe remains politically stable. In across Europe, we like to answer, “Be- other words, if peace is preserved. And after all, that cause good deals don’t have to travel is perhaps the major issue for Europe going forward, far.” And good deals are all around us given that the return of armed conflict to the Euro- on this continent filled with economic pean continent would in all likelihood generate global culture and entrepreneurial spirit. In instability, much as it did in 1914 and 1939. CIO LETTER

In conclusion, what can we expect for Europe? Should we be more ambitious or keep the peace?

To try to understand what the world port in old Prussia. Hitler was elected in 1933 with can and should expect for Europe in massive Prussian backing. Every time Prussia has the 21st century, we probably have to given in to the temptation of extremist voting, Europe go back to the origins of the European has lived through a period of political instability often Union. In 1952 (European Coal and leading to war. Perhaps that is why, in October 2016, Steel Community), then in 1957 (Treaty former Vice-Chancellor and Foreign Minister Josch- of Rome), the stated goal of the “foun- ka Fischer, who headed the Green Party, published ding fathers of the Union” was twofold: an article entitled “The West on the Brink” 14 , stating to strengthen economic cooperation that extreme-right party Alternative Fur Deutschland between Member Countries during the and extreme-left party Die Linke share something in post-war reconstruction, and to create common: they both reject ties to the west and favour institutions that would force dialogue in going back to Germany’s natural partner, Russia. the interest of preventing another war hen he left the German chancellery in 1998, on European soil. A third, more dis- Helmut Kohl delivered a heartfelt, meanin- creet, objective is put forward by Fré- gful speech calling himself the last German déric Encel in his book Petites Leçons W Chancellor to have experienced the horror of war. de Diplomatie 13 : erecting a fortifica- 13 In 2012, German daily Bild 15 published an interview Petites Leçons tion against communism, which was with Helmut Kohl in which he shared his fear that the 14 de Diplomatie swiftly winning supporters in Europe financial crisis would tempt young Germans to once (A few small lessons as it was elsewhere in the world at the again question Germany’s place in the European taught by diplomacy) time. Based on these stated (unstated) Union, reiterating that the main legacy of 65 years of Frédéric Encel, 2015 objectives, the Union is an undeniable European unity is peace. success. 14 At a time when companies are questioning their o date, keeping the peace can The West on the Brink” purpose, it might be interesting to ask this question be seen as the greatest success Joschka Fischer, of the European Union in the 21st century. The US of the European Union. In that 3 October 2016 T and China are betting on technological, monetary and regard, statements made by German https://www.project-syn- military domination to maintain or assume global lea- politicians are probably no accident, dicate.org/commentary/ dership. Should Europe absolutely try to follow suit? western-elections-trump- insofar as Berlin’s geographic location ...with a high probability of failure. The “managed le-pen-merkel-by-joschka- allows Germany to change directions democracy” approach taken by China, Russia and fischer-2016-10/ by focusing its efforts equally on the Turkey, prioritising economic development or certain west and the east. After World War II, key objectives while sometimes placing individual 15 the European Union and NATO allowed freedoms on the back burner, seems to be gaining “Wie soll das Europa Germany to stay rooted in the west; supporters in developing countries, where the wes- der Zukunft aussehen?” however, should these institutions be tern liberal democratic approach no longer sparks the by Helmut Kohl for weakened, Germany might turn back same admiration it once did. Should Europe adapt Bild, 27 February 2012 to the east. For now, the Franco-Ger- its approach to keep up with changing trends, or man alliance is Germany’s priority, but affirm a certain “raison d’être”, one that respects its of the two countries, only Germany own uniqueness, cultural diversity and excellence? has a Plan B: an alliance with Russia. Shouldn’t Europe assert itself as the world leader of Historically, German extremist parties the energy transition and environmental issues? Des- have always found their electoral sup- pite the major challenge of immigration, can’t Europe set the example as a land of refuge and integration, opening up its training and education system at a time when other countries are closing their borders and are tempted to give in to protectionism? ust as a company’s efforts to Europe is on the cutting edge of SRI, and define its purpose can create a politicians are now keen to take up the J cultural guidepost that will pre- baton. The same can happen in the vent it from drifting with the current fields of education, training, and in- and adopting practices that are not ali- clusion to reduce inequalities. It is gned with its values, couldn’t the same not just Europe’s responsibility to efforts be made in Europe to prevent it show the way, but more impor- from becoming swept up in nationalist, tantly the European private sec- protectionist, climate change-denying tor’s role to be an example in - or simply cynical and short-sighted - these areas. The lawmakers will currents? Even if this is not the easiest then follow suit. path to embark on - in that it requires t a crossroads in the so much to be done on the grassroots history of post-war Eu- educational front, which calls for poli- rope, when nationalist, tical courage and risk-taking on the A regionalist and/or protectionist part of our leaders - it is worth it for inclinations are resurfacing, Europe to not only continue existing when for the first time since the and inspiring in the 21st century, but Treaty of Rome in 1957 Europe also to attract global investments to 15 is on the verge of less integration, finance the real economy and maintain headed towards deconstruction, social stability capable of protecting we would do well to ask ourselves its democratic approach. To that end, this question: should we be satisfied private-sector initiatives must be taken with peace, the undeniable success to trigger the movement and policies of the European Union, as the ultimate will follow. Socially responsible in- goal of continental unity. Should we be vestment is a good example: the fixated on defending the current European world’s major investors triggered system, seemingly on par with greater tech- an investment tidal wave by nocratic complexity, in a Europe of 27 nations demanding that environmen- where the weight of regional cultures offers only tal, social and governance consensus as the decision-making process? At the criteria be included in the risk of destroying everything in the event of economic decisions made by the failure, synonymous with the return of populism - if not firms investing their outright totalitarianism. Such, perhaps, is the dilemma of money. the European prisoner. Just peace? Peace, plus econo- mic integration? With the potential for war to return if this integration fails? There may be another way, however: peace and a new European system, the only possible sys- tem, one that would reduce inequalities in order to avoid conflict, and would respect the Paris Climate Agreement in order to preserve an acceptable way of life for as many people as possible. 32, rue de Monceau 75008 Paris FRANCE Phone : +33 (0)1 53 59 05 00 Fax : +33 (0)1 53 59 05 20

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