Geopolitical Update : Von der Leyen is likely to surprise, and usher change in Europe

By Christian Takushi, Independent Macro Economist & Geopolitical Strategist. 15 July 2019 (this is an adapted excerpt of the original research report – released 40 hours delayed)

While I am monitoring the US political process, the Middle East deterioration, EU-US/China-US tensions, S-400 system deliveries to India, and central bank competition among other developments, I’d like to focus here on the EU Political Process

The European Union elects a new leader: Although the outcome is open, so far most signs point to Mrs. Ursula von der Leyen (short: VDL) to be confirmed in the highest executive position at the EU.

My independent analysis shows that Mrs. Ursula von der Leyen is very likely to usher a period of unprecedented change in Europe.

Merkel’s Germany is fading away, Europe to follow

Much opposition has been announced against von der Leyen ahead of this week, but my independent assessment is that both von der Leyen and Lagarde will be confirmed – barring any last minute revolt. These are the top EU jobs. Sadly, von der Leyen’s confirmation may disappoint all those that demanded the EU commission should step closer to a democratic process. Still, she is the most likely person to lead the EU through the crises & challenges ahead “successfully”. Successfully, not meaning the preservation of the EU or the EURO, but the painful changes necessary to move towards her envisioned European Federation (what I call a European Super State). Should the SPD launch an all-out assault against VDL, I expect Mrs. Merkel to let go of the SPD in order to work with the Greens. Worse case, Merkel will give in to Christian Lindner’s FDP.  Lindner didn’t want to be part of the Government coalition, but to be overtaken by VDL is something he has to digest. VDL’s sudden rise may force Lindner to position himself in Berlin earlier than what he had envisioned. Lindner is a highly skilled young politician – representing German businesses and liberal-educated voters. Unlike VDL he is a savvy power broker.

Unlike all other EU leaders of the past 20 years, Mrs. Von der Leyen is not utterly opposed to overhaul a dysfunctional EU to embrace something better. The point is many in Europe may disagree as to what is “better”. In many a way, she is not a EU supporter. She doesn’t support the status quo in Europe. Her vision of a European Federation should make her want to test the limits of this current dysfunctional EU. This in order to overhaul it.

The nationalists & populists’ worse nightmare?

Von der Leyen is an unassuming political leader without an own power base, but with a clear-cut vision of a European Federation for which she has no popular mandate. Nevertheless VDL is probably one of the few EU leaders that could make such a vision more popular among an otherwise polarized electorate. Legitimization from the top or through the back door.

As a Macro Economist I have been critical of the EU since 1995 when the politics-induced premature introduction of the EURO – and the systematic impoverishing of entire nations – became clear. But over the years I have spoken about the potential rise of Mrs. von der Leyen; and I think that she is still a highly underestimated person with a somewhat underestimated agenda. Many governments and parliament fractions settled for her .. in order just to block the main candidates. Many are supporting her, because of her perceived low-key, low risk & soft character. Most of those fractions & loose alliances think they are electing a weak leader (person void of a large power base); one they can mold to their liking. Surely, many factors can play a role at the meta-level of politics, but if my monitoring over the past ten years of VDL is reliable, power brokers may be in for a big surprise.

Daring to think ahead .. while markets remain in denial

This is what I expect from Mrs. Ursula von der Leyen at the helm of the EU should she be confirmed ..

(it is the latest assessment, and I would review it if assumptions & subsidiary conditions change)

1. A person of personal convictions & visions that will not be easy to control for EU organs in Brussels and Strasbourg. She is not a typical power politician that cares about every poll and public opinion. Normal citizens may find her refreshing though. Many top officers at the German Bundeswehr (German Military) did underestimate her at the onset of her tenure. Against her government’s pro-Iranian line, VDL armed the Kurdish Peshmerga (one of Iran’s foes)
2. She is likely to surprise as anti-thesis to Mr. Juncker and at times Ms. Merkel. She is likely to be more European than German, independent, emotionally convincing and better able to communicate with the masses than Mrs. Merkel or Mr. Juncker
3. She might be able to advance the shared European vision of President Macron (France) and Bundespräsident Steinmeier (Germany). A European Army is coming. I expect since 2016 much more Fiscal Spending in Europe in the coming years and a massive growth of the role of the state: i.e. a further rise in the government share of demand & supply. Over 2/3 of households are likely get an income from the state or thanks to state action / regulation
4. With her rather traditional conservative family background & perceived integrity (no or few scandals) she could win back some conservative voters from the populist fringes. She is likely to help keep conservative-populist parties from taking power in key EU states
5. She is likely to let old & dysfunctional EU institutions collapse or be shaken for the sake of renewal and advancing the long term European vision, a vision that voters have not directly sanctioned yet

With a more politicized ECB and a new EU leader bent on shifting up the gears of integration, markets have to brace themselves for more fiscal spending, more regulation, and a yet bigger role of the state in Europe. Markets have not priced this yet. 

The changes ahead will impact many central banks as their respective governments & parliaments will increasingly demand their loyalty to national interests. The rise of competition and impaired cooperation among central banks is not something investors have prepared for.

It is a Europe that  ..

To read the full report, please write to c.takushi@bluewin.ch to subscribe for his reports