Speaker 1: Bloomberg Audio Studios, podcasts, radio news. One of the key
Speaker 1: recommendations of Mario Dragi's report into restoring Europe's competitiveness was
Speaker 1: issuing more common EU debt. Several key European countries are
Speaker 1: against that idea and it's become part of the debate
Speaker 1: over the next seven year EU budget, which is currently
Speaker 1: being negotiated. So how important is common debt to Europe's future.
Speaker 1: Let's get an investor perspective now from Angel Ubide, who
Speaker 1: is head of economic research for Global Fixed Income and
Speaker 1: Macro at Citadel and how you've worked in financial services
Speaker 1: for some two decades. You're also a member of the
Speaker 1: Spanish government's Advisory Council on Economic Affairs. I wonder when
Speaker 1: you think about this in the context of the Dragy report,
Speaker 1: the conversation that has been ongoing among you member states
Speaker 1: about common debt for many years. Now, why is now
Speaker 1: the time that more joint debt needs to be agreed?
Speaker 2: So I think there are three reasons why now is
Speaker 2: the time right. The first one is the need, and
Speaker 2: the need is really related to the need to achieve
Speaker 2: a strategical autonomy. It's very difficult to have a strategical autonomy.
Speaker 2: If you don't have the military, the financial and the
Speaker 2: economic power, and you cannot have the financial and economic
Speaker 2: power if you don't have a save facet, then nominated
Speaker 2: in your own currency. And right now Europe is built
Speaker 2: on a save acet, the nominated on US dollars essentially,
Speaker 2: and that cannot be a robust and stable base. The
Speaker 2: second is the opportunity because there is a lot of
Speaker 2: demand for European debt. When I go around the world,
Speaker 2: I can tell you have lots of conversations with other
Speaker 2: investors and there is always the issue about we both
Speaker 2: increase our holdings of Euros in our reserves in our
Speaker 2: portfolios if there were eurobons. And then the third, as
Speaker 2: we discuss, is that there is also the institutional support.
Speaker 2: The ACP has become much more proactive in the emotion
Speaker 2: and of the idea of the international role of the Euro.
Speaker 2: But it's very difficult to have an international currency if
Speaker 2: you don't offer investors what they want and what they
Speaker 2: want it's a safe asset that is deep, that is deep,
Speaker 2: that is liquid, and that is in large size. So
Speaker 2: I think those three elements are the reason why now
Speaker 2: is the time?
Speaker 1: Do you feel the pressure from the Trump administration on
Speaker 1: the EU over defense, over trade could help to perhaps
Speaker 1: encourage those reluctant countries to get on board with the idea,
Speaker 1: given the contacts that you've outlined.
Speaker 2: At least in directly right. If this is forcing a
Speaker 2: conversation really about the strategic autonomy about how to make
Speaker 2: Europe more independent and more robust, then one of the
Speaker 2: elements has to be this. Whether it's going to be
Speaker 2: the deciding element or not, I don't know, but it
Speaker 2: is forcing a conversation about this.
Speaker 1: Definitely. If you're putting a room in front of reluctant
Speaker 1: to European leaders to talk about this, what is the
Speaker 1: key point you'd want to be driving home to them.
Speaker 1: For those who are still not on board the idea.
Speaker 2: Well, I guess it can be done in a couple
Speaker 2: of ways. One part of those who are against would say,
Speaker 2: but we have German boons, why do we need eurobones?
Speaker 2: And the answer is, while German boons are small, and
Speaker 2: when you push it, really German boods are the same
Speaker 2: facet of Germany are not just the safe acet of Europe.
Speaker 2: We need a safe ucet that belongs to the whole
Speaker 2: of Europe. And then I think the second is that
Speaker 2: if you want to really be independent, you need to
Speaker 2: have your own asset. And as I said, you cannot
Speaker 2: build the foundations of your financial sector with an asset
Speaker 2: that is nominated in a foreign currency where you are
Speaker 2: going to have foreign currency risk, where you are going
Speaker 2: to depend ultimately on a foreign payment system, clearance system,
Speaker 2: and financial system. At the end of the day, you
Speaker 2: need those two things. Without that, you are never going
Speaker 2: to really achieve a strategic autonomy.
Speaker 1: So would the creation of these your bonds as you
Speaker 1: describe them, reduced demand though for some of the sovereign
Speaker 1: debt as well, because that's another argument that can be
Speaker 1: made at a national level is that you know, your
Speaker 1: own national death is going to get more expensive because
Speaker 1: some of those investors are going to be looking at
Speaker 1: the new comedy U death.
Speaker 2: So during the transition period that could be wiggles, right,
Speaker 2: it always happens, But in the long run, our view
Speaker 2: is that it is going to increase the total demand
Speaker 2: for European assets. So it's not necessarily going to cannibalize
Speaker 2: national bonds, but it's going to add to it. Let
Speaker 2: me give you a specific example right right now, the
Speaker 2: eurobones that are existing in the EU, bones and bills
Speaker 2: are considered supranationals. They are not considered sovereign bonds. If
Speaker 2: and when these EU bonds and bills would become sovereign bonds,
Speaker 2: as we support, because of increased size and increase clarity
Speaker 2: about future issuance and all that, it would be another
Speaker 2: additional asset that foreign investors could buy. So it would
Speaker 2: THENT be instead of it would be in addition to
Speaker 2: and so in a study state, we would think because
Speaker 2: of that, and because it would also make the European
Speaker 2: economy more stable, and therefore it would reduce the risk
Speaker 2: associated with all of the bonds within that the average
Speaker 2: interest rate of funding the debt in Europe would come down.
Speaker 1: How should the debt be paid for? There's already an
Speaker 1: issue with the current joint debt that was issued during
Speaker 1: the COVID pandemic by the EU and further recovery fund.
Speaker 1: You know, there's meant to be new EU taxes own
Speaker 1: resources as they're known, and the EU budget to be
Speaker 1: able to pay for them. That money hasn't materialized and
Speaker 1: it's now a big blocking point in the current EU
Speaker 1: budget negotiations. Where should the resources come from to pay this.
Speaker 2: So we solve quote unquote that problem by avoiding the
Speaker 2: need for new resources and proposing that this debt would
Speaker 2: be apported by a transfer of existing resources at the
Speaker 2: national level. Right the same way that we don't argue
Speaker 2: that we should be issuing these debt for new spending programs,
Speaker 2: because those should be two different decisions. We are not
Speaker 2: arguing that new taxes should be created, because again those
Speaker 2: should be two different decisions. So the way we articulate
Speaker 2: this is each country would agree and commit to transfer
Speaker 2: a share of their own tax revenues to these to
Speaker 2: the service of these eurobonds, and those would be the resources.
Speaker 2: So we are not proposing to increase the debt and
Speaker 2: therefore we don't need to increase the resources.
Speaker 1: Can you give me sort of two contrasting scenarios of
Speaker 1: if the EU did this and if they didn't, what's
Speaker 1: the sort of benefit for the European economy if this
Speaker 1: instrument is created and what would happen if it's not
Speaker 1: done and we continue in our current path.
Speaker 2: So I think the benefit is we assume we expect
Speaker 2: and I think we are in a strong basis on
Speaker 2: this that the cost of funding for the European economy
Speaker 2: would come down, and that at the margin increases potential growth.
Speaker 2: It also creates more stability. It almost eliminates the possibility
Speaker 2: of a run on any of the countries. Right, of course,
Speaker 2: nothing can be ruled out any country, not just in
Speaker 2: the Eurozone. Any country in the world can one day
Speaker 2: decide to misbehave, and that consideration should always be there.
Speaker 2: But when we put this thing together, it provides the
Speaker 2: European economy with an instrument that is just going to
Speaker 2: increase the stability. Now, if we don't have it, life
Speaker 2: continues as it is today. But then it is going
Speaker 2: to make the European economy again hostage to a foreign
Speaker 2: denominated asset and inner world in which all the main
Speaker 2: regions are moving forward towards some sort of and I'm
Speaker 2: going to use the word strategical autonomy right investing in
Speaker 2: all the critical sectors, in all the critical materials, not
Speaker 2: just defense, but energy and artificial intelligence and everything else.
Speaker 2: The U area is going to be the one with
Speaker 2: the weakest foundation if it doesn't have eurobonds.
Speaker 1: Traditionally it's the more centrist governments that have agreed to
Speaker 1: big advances towards more integration at European level, which, of
Speaker 1: course this would be another step towards. Would you be
Speaker 1: concerned that if there are populist governments elected, you know,
Speaker 1: there are big elections coming up, for example in France
Speaker 1: next year, that they will take this idea completely off
Speaker 1: the table.
Speaker 2: Well, I would hope they don't. I think we still
Speaker 2: have to do a fair amount of explaining. We have
Speaker 2: to convence not just those parties, but everybody that this
Speaker 2: isn't the benefit of every single European citizen right is
Speaker 2: living money on the table, or as the Spanish Vice
Speaker 2: President and Minister of Finance Carlos square Posa at an
Speaker 2: event recently at the Peterston Institute in Washington, is saving
Speaker 2: tax payers money? And I think we should all agree
Speaker 2: that saving taxpayers money should be a priority for all
Speaker 2: European leaders, and that would be the way to do it.
Speaker 1: Can investors have confidence that this money would be spent
Speaker 1: effectively if this new debt is raised? These Court of
Speaker 1: Auditors has already asked a lot of questions about where
Speaker 1: billions of the COVID recovery money which came from the
Speaker 1: EU was spent by member states.
Speaker 2: So we avoid this problem here by not associating these
Speaker 2: europe Bones to any particular spending program. That's why we
Speaker 2: do it as well, right, So all we are doing
Speaker 2: here is optimizing debt management, is reducing the cost of debt.
Speaker 2: We are not donning a euro to the current stock
Speaker 2: of debt. Now. If in the future European leaders decide
Speaker 2: to create a program of European public goods which means
Speaker 2: increasing spending, and they want to fund it with eurobonds,
Speaker 2: it's absolutely fine with us. But that is not what
Speaker 2: we are proposing. So our proposal does not run into
Speaker 2: the risk that the money will be misuspent because we
Speaker 2: are not proposing to increase spending.
Speaker 1: I want to ask you about some of the other
Speaker 1: big issues identified in the drag E reports as potential
Speaker 1: blocks on growth and increasing Europe's competitiveness. One of them
Speaker 1: is the massive stock of money that is in savings
Speaker 1: accounts across Europe. We don't have the same investment culture
Speaker 1: in Europe that there is in the United States. How
Speaker 1: easily can that be changed? And is this just fiscal
Speaker 1: levers that need to be used by government's fiscal incentives
Speaker 1: to try and get that money moving out of savings
Speaker 1: accounts and into more productive investments.
Speaker 2: So that's an issue, right. There is this line that
Speaker 2: says that if you have a sleepy deposits, you are
Speaker 2: going to have a sleepy economy. And yes, I think
Speaker 2: we need to change the attitude towards risk towards investment
Speaker 2: across European citizens. There are different ways to do it.
Speaker 2: One option I have proposed. I've been living in the
Speaker 2: US for many years, and I think one of the
Speaker 2: reasons why American citizens have a more benign attitude towards
Speaker 2: risk is that they have to invest in their own,
Speaker 2: for one accounts, the private pillar of their pension right.
Speaker 2: And because you have to do that, you get used
Speaker 2: to having a part of your savings inequities, and then
Speaker 2: you are more used to seeing volatility. But at the
Speaker 2: same time you are also channeling a lot of these
Speaker 2: savings into productive investments. So one way to change this
Speaker 2: attitude in Europe would be to also promote the adoption
Speaker 2: of a private pillar in pension funds. That would not
Speaker 2: only make people more open probably towards towards private, private,
Speaker 2: and risky investments, but it would also channel that money
Speaker 2: that is now basically sleeping in bank accounts that are
Speaker 2: then in as many government bonds, it would channel it
Speaker 2: towards private investments.
Speaker 1: To do that, do we need to be a bit
Speaker 1: more perhaps open? Some might argue realistic about the future
Speaker 1: of state funded pensions in Europe as well. The demographics
Speaker 1: aren't good in many countries. I think the conversation anecdotally
Speaker 1: that many people will have is there'll be no pension
Speaker 1: for me when I retire from the state. Do we
Speaker 1: need to say that more seriously? Do we need to
Speaker 1: hear that more from leaders and from you know, big
Speaker 1: investment houses like yours.
Speaker 2: Well, I think when you look at the way the
Speaker 2: European Commission does the long term projections for fiscal sustainability,
Speaker 2: there is the fiscal projections and then there is what
Speaker 2: they call a demographic component, right, and they claim that,
Speaker 2: all right, the demographic component has to be taken into
Speaker 2: account as well with either spending cads or tax increases. Today,
Speaker 2: one way we could deal with this is to say
Speaker 2: that that demographic component could be with a private pension pillar. Now,
Speaker 2: there is a transition issue. There is always a transition
Speaker 2: issue when these things happen, so there is a cost
Speaker 2: to it. It's a one off, but I think it's
Speaker 2: a good investment into the future because at the margin
Speaker 2: this would also increase potential growth for the European economy
Speaker 2: because there would be more funds that are channel towards
Speaker 2: more productive activities in the private sector.
Speaker 1: I mean, our pensions a time bomb for the European economy.
Speaker 2: Well, there are a time bob everywhere, right when you
Speaker 2: look at the demographic profile. Even in the United States,
Speaker 2: birth rates now are below the replacement rate, right, So
Speaker 2: that's happening everywhere everywhere. There is going to have to
Speaker 2: be some adjustments, and I think one way to make
Speaker 2: these adjustments in a productive manner is to think at
Speaker 2: the private pillar.
Speaker 1: Just a question too about the finance industry across Europe
Speaker 1: as well. We don't have the big cross board or
Speaker 1: banks that there are ambitions to have, certainly as in Brussels,
Speaker 1: and every time it seems that we've talked about a
Speaker 1: big bank merger, we've had interventions from governments at a
Speaker 1: national level to try and either dissuade or prevent in
Speaker 1: some cases. I mean, how do you reconcile these positions.
Speaker 1: You can make the arguments that big banks are important,
Speaker 1: but it really feels like that voters and national governments
Speaker 1: don't want to listen.
Speaker 2: Well, I'm going to quote my fellow Espanier Luista Windos,
Speaker 2: who gave an interview over the last couple of days,
Speaker 2: basically saying that what is happening in the merger between
Speaker 2: unique credit and commerce is an example of this. Right.
Speaker 2: If we don't create European banks, is going to be
Speaker 2: almost impossible to have a European capital market. And it's
Speaker 2: not just a question of size, and size is very important,
Speaker 2: but it's also a question of channeling the savings across
Speaker 2: the different countries, and investment is a relationship business. You
Speaker 2: need to know the people. You need to have the
Speaker 2: trust of the savers and the trust of the investors.
Speaker 2: I always say, if you have savers in Andalusia in
Speaker 2: Spain and you want to convincement that there is a
Speaker 2: very good investment opportunity in the north of Germany, you
Speaker 2: need to know both. And you are not going to
Speaker 2: be able to do that if you are just a
Speaker 2: domestic bank. You are going to need to have European
Speaker 2: banks with presence everywhere, the same way that the US
Speaker 2: has interstate banking that is across the whole continent of Europe,
Speaker 2: and that they can move the savings around to the
Speaker 2: most productive investments.
Speaker 1: Have has the EU at an EU wide level done
Speaker 1: enough to encourage that is? Does more need to be
Speaker 1: done to facilitate those the creation of those sorts of banks.
Speaker 2: Well, there is one argument, right that there are barriers
Speaker 2: to liquidity across countries, and this is not a question
Speaker 2: of regulation. It may be more a question of supervision.
Speaker 2: It may be also a question of domestic political needs
Speaker 2: that each country, I think that it needs to have
Speaker 2: its own national champions be the same story as the Europeans. Right,
Speaker 2: and ricolletta former Italian Prime minister, always says that there
Speaker 2: are countries that are small and countries that don't know
Speaker 2: they are small in Europe, and I think we need
Speaker 2: to overcome that. We need to think that the way
Speaker 2: to face the current geopolitical competition with the US and
Speaker 2: which China is with more Europe and more Europe requires
Speaker 2: creating European banks and European champions.
Speaker 1: And just to conclude, what's your biggest concern for the
Speaker 1: future of the European economy right now?
Speaker 2: I think my biggest concern is that European leaders don't
Speaker 2: realize that both China and the US have hit the
Speaker 2: ground running in the competition for military, for security, for energy,
Speaker 2: for resources autonomy. There is a tremendous amount of investment
Speaker 2: that is being put to play, and I worry that
Speaker 2: in Europe we are going to continue to wonder more
Speaker 2: about the rules and about the intra European differences than
Speaker 2: about what it needs to be done in order to
Speaker 2: win this race. I always have this feeling that in
Speaker 2: Europe we worry much more about the internal enemy than
Speaker 2: about the external one. Right, we always worry about whether
Speaker 2: Italy is going to do this or France is going
Speaker 2: to do that, rather than wondering how do we compete
Speaker 2: in the global scene? And is that that process? That
Speaker 2: delay that worries me because by the time euro wakes
Speaker 2: up it might be too late.
Speaker 1: How far behind is Europe and that race.
Speaker 2: Well, it's difficult, it's difficult to measure. But there is
Speaker 2: one number which is in the Drug report, right, five
Speaker 2: trillion euros of investment. And the Drug report is what
Speaker 2: two years old? So maybe we are two years late.
Speaker 1: And I suppose I've asked you about your worries, I'm
Speaker 1: obliged to ask you as well, what are you most
Speaker 1: optimistic about where do you draw hope from the current conversation.
Speaker 2: I think Europe. Europe has a lot of upsights. One
Speaker 2: thing that I think people underestimate is that when you
Speaker 2: measure it properly, and I know there has been a
Speaker 2: lot of talk here about whether European GDP is lacking
Speaker 2: in the US by a large amount, but a lot
Speaker 2: of that is the change rate evolution. Right, when you
Speaker 2: measure it properly, over the last twenty five years, GDP
Speaker 2: per capita in Europe has only been around one or
Speaker 2: two tents less than in the US on average. Right,
Speaker 2: that's not much. So that's the good news, And that's
Speaker 2: the good news because that has happened despite the fact
Speaker 2: that we have a big and deep euro crisis that
Speaker 2: was a massive headwind for Europe. So despite all that,
Speaker 2: Europe has a lost much distance with respect to the US.
Speaker 2: What that means is that if we can avoid a
Speaker 2: crisis over the next ten years, and if we do
Speaker 2: the investments we need to do, I think the future
Speaker 2: is bright. It's just a question of wanting to do it,
Speaker 2: living in it, a gert into it,