Editor's overview: The end of Pax Americana — twilight of the West or Europe’s opportunity?
As Donald Trump leads the US's retreat from the world, how will global capital markets react to this tilting of the landscape? Some see an opportunity for Europe and its banks. Others see a hastening of the inevitable rise to global influence of other powers — above all China, but also Russia and India — and perhaps even, in its own region, the newly assertive Saudi Arabia. By Toby Fildes.
The old world order is creaking. The administration of President Donald Trump is retreating from the international institutions that have played a central role in preserving peace and advancing economic progress since the end of the Second World War.
Since his election in 2016, Trump has hesitated to affirm Nato’s collective defence principle, rebuffed World Bank requests for extra funding and taken the US out of the Paris Agreement on climate change.
On trade, he has removed the US from the Trans-Pacific Partnership, a multilateral trade deal, questioned its commitment to Nafta and attacked the World Trade Organisation, while hindering it from filling vacant posts on its panel of judges.
Senior politicians and business leaders worry that the US can no longer be relied on to act as the world’s policeman and funder of last resort, and that even the concept of the West — a liberal, democratic space that could attract other countries — is doomed to die as US support withers.
Many still hope this is just a blip — that the US’s retreat from the world will prove temporary. “Is it really responsible for America to truly withdraw from multilateralism?” questions Jin Liqun, president of the Asian Infrastructure Investment Bank.
“Given the scale of the US economy, I wonder if it is possible for the US to truly remove itself from multilateral co-operation.”
America-philes hope that the US under Trump will preserve something of its former internationalism. Werner Hoyer, president of the European Investment Bank, says he “still believes in the wonderful heritage of the US”, and in particular of America’s ability to coin phrases such as “winwin” that conjure up a sense of co-operation in a troubled world.
He and others cling to the belief that the US will return to the world stage, and that in the interim, other sovereign voices can fill the void.
“Our political leaders in Europe will do everything to ensure that co-operative structures and the basis of multilateralism are preserved,” Hoyer says. “Europe must be at the vanguard when it comes to multilateralism.” Hoyer’s optimism comes at a time when Europe is, for the first time since the crisis, posting decent economic growth. Those who like to look on the bright side also argue the region is the most politically stable it has been since 2007, having got past potentially tricky elections (France, the Netherlands) and seen flashpoints (Spain/Catalonia) fizzle out. Italy, thanks to changes in its constitution, should avoid electing far left or far right governments in this spring’s election. Only Germany is spoiling the idyll, having failed to form a government since its autumn election. Meanwhile, even the Brexit negotiations are at last showing some progress, with a preliminary deal on money, the Irish border and citizens’ rights.
On climate change at least, China and the EU are running ahead with the torch, even though the US has dropped back for the moment. But although they can provide leadership, in this area as in defence and trade, action matters too. If the US does not play ball, it is hard for the game to go on.
Tilting of the landscape
What does this tilting of the landscape mean for capital markets?
China will one day be the centre of these, but that remains far off. For the time being, the huge wealth and size of US markets makes them the pole, and the top five American investment banks are the biggest and most successful in the world.
Their closest chasers in the Dealogic revenue league tables, Credit Suisse and Barclays, have big US businesses.
A reviving European economy will give a lift to European banks like Deutsche Bank, BNP Paribas and Credit Suisse which are trying to revive their fortunes after the attrition of the past nine years. Investment banking is a leveraged play on GDP and if Europe is beginning to hum, so too will its banks, especially if interest rates begin to rise.
However, the top five US firms dominate the higher margin parts of even Europe’s capital markets. For example, in EMEA equity capital markets, they have a combined market share of 35% — as much as the top 11 European banks. The new star of bond league tables in 2017 was Citigroup.
But anyone thinking Trump’s isolationism will put US banks on the back foot is sorely mistaken. The direction of policy under Trump seems certain to be an easing of restraints on Wall Street firms, which European bankers already envy as having an easier ride (though American bankers think the opposite). And they are about to get a whopping tax cut.
Europe may gain fractionally in geopolitical stature from Trump’s own goals, but it is not a country and has far too little unity to really exploit its position on the world stage.
One change of status that will become apparent in 2018 is the fading of UK supremacy in European financial markets. New York’s nearest rival, London, has just shot itself in both feet with Brexit.
Continental European bankers and investors have a new spring in their step. It is quite clear that the centre of gravity of European capital markets is crossing the Channel. Even if London manages to keep a large share of employment in the sector, the rules will be made in Brussels for this market of 450m people, and the best the UK will be able to do is keep tagging along.
Again, this will make little difference to the banks: they can move capital, offices and staff fairly easily if they have to. It is the economy of London, and hence the UK, that is vulnerable.