By John Mauldin

Italian dictator Benito Mussolini at least made the trains run on time, according to legend. But other sources say the nation’s railway system remained horrible under his rule (see here, here, and here).

The same may be true of modern Europe’s (and Canada and Australia and…) vaunted social welfare programs. Certainly, they have helped many people, but they haven’t eliminated poverty, nor let everyone retire in comfort. Could they simply have shifted spending forward, leaving future generations with the bill? Today, we’ll explore that question as part of my continuing Train Wreck series.

Last week, I looked at US public pension funds, many of which are woefully underfunded and will likely never pay workers the promised benefits—at least without dumping a huge and unwelcome bill on taxpayers. And taxpayers are generally voters, so it’s doubtful they will pay that bill. (Even the Swiss, as we will see below, voted against a mild reform to pay for their pension system.)
Non-US readers might have felt a little satisfaction at that. There go those crazy Americans again, spending wildly beyond their means. You are partly correct; we aren’t exactly the thriftiest people on Earth. However, your country may be more like the US than you think.

The Money Isn’t There
Last year, a World Economic Forum study looked at six developed countries (the US, UK, Netherlands, Japan, Australia, and Canada) and two emerging markets (China and India) and found a $400 trillion retirement savings shortfall by 2050. That’s how much more is needed to ensure everyone of retirement age will receive 70% of their working income, including government, employer, and personal savings—but mostly government.
This staggering number—more than the entire planet’s annual GDP—doesn’t even include most of Europe. Yet unless those countries somehow find the cash, they will break the promises they’ve made to today’s workers.

$400 trillion sounds like a lot of money. It is. But the eight countries in that total represent around 60% of global GDP (my back-of-the-napkin calculation), so you could say that we should add another $250 trillion to get the total global retirement gap. Your mileage may vary by country and demographics.
And for many countries, like the US, that doesn’t include healthcare and other obligations. The final letter of this series will start adding everything up. I actually haven’t done that calculation yet, but we may scare one quadrillion dollars, with a “Q.” That’s with a global economy that is less than $80 trillion today.
Remember what I’ve said in this series so far: Promises like these are debt, whether they show as such on the balance sheet or not. Breaking them is equivalent to debt default. The creditors (workers) will certainly perceive it that way, at least.
As I’ve also noted, increasing life expectancies are driving this problem.

Reaching age 100 is already less remarkable than it used to be. That trend will continue. The good news is we will also be in better health at those advanced ages than people are now. Could 80 be the new 50? We’d better hope so, because the math is bleak if people stop working at age 65–70, which is precisely what the Wall Street Journal wrote this week on their front page. And we see it in the lack of workers available out in the real world.
That said, I think we will see a great deal of national variation in these trends.

Some countries have robust government-provided retirement plans, others depend more on employer and individual contributions. In the big picture, though, the money simply isn’t there. Nor will it magically appear just when it’s needed.
WEF reached the same conclusion I did long ago: This idea of spending decades in leisure before your final decline is unfeasible and is quickly reaching its limits. Most of us will work well past 65, whether we want to or not.
What about the millions presently in retirement, or nearly so? That’s a big problem, particularly for the US public-sector workers I wrote about last week. We should also note that we’re all public-sector workers in a way, since we must pay into Social Security and can only hope Washington eventually gives us something back.
And this is going to get worse as the new anti-aging technologies spread.

Some are here now. Here is the current life expectancy chart, via Wade Pfau writing at Forbes.

Source: Wade Pfau

When the anti-aging tech kicks in, we will need to shift those curves to the right ten years (at least!!!!). And then I think age reversal will show up by the early 2030s and be ubiquitous by the 2040s.
That’s great news for those who want to live longer, younger, and healthier, but it will force radical changes in our retirement and work.  

Meanwhile, automation will be killing millions of jobs. (By the way, our own Patrick Cox is on top of all this and we’re planning some Mauldin Economics white papers this fall that will outline the possibilities for extending your health span.)
Now, let’s look at a few individual countries.

Safety Valve Stuck

We’ll start with our closest European ally, the United Kingdom. The WEF study shows the UK with a $4 trillion retirement savings shortfall as of 2015, projected to rise 4% a year and reach $33 trillion by 2050. In a country whose total GDP is around $2.6 trillion, the shortfall is already bigger than the entire economy and, with even modest inflation, will get worse.
Further, this was calculated before the UK decided to leave the European Union. That major economic realignment could certainly change the outlook.

Whether for better or worse, I don’t know yet. The answer depends on which of my friends I ask and what side of the Remain or Leave fence they are on.
A 2015 OECD study said developed-country workers could on average expect governmental programs to replace 63% of their working-age income. Not so bad. But in the UK, that figure is only 38%, the lowest of all OECD countries. This means UK workers must either save more personally or severely cut spending when they retire.
UK employer-based savings plans aren’t on especially sound footing, either. According to the government’s Pension Protection Fund, some 72.2% of the country’s private-sector defined benefit plans are in deficit, and the shortfalls total £257.9 billion. Government liabilities for pensions went from well-funded in 2007 to a £384 billion (~$500 billion) shortfall ten years later and no doubt grew further since. Again, that is a rather large amount for a less than $3 trillion economy.
To this point, UK retirees have had a kind of safety valve: the ability to retire in EU countries with lower living costs. That option may disappear after Brexit.
A report last year from the International Longevity Centre suggested younger workers in the UK need to save 18% of their annual earnings in order to have an “adequate” retirement income, which it defines as less than today’s retirees enjoy. That’s just fantasy. No such thing will happen, so the UK is heading toward a retirement implosion that could be at least as chaotic as in the US.

Having Cake

Americans often have a romanticized stereotype of Switzerland. It is certainly one of my favorite countries. We think it’s the land of fiscal discipline and rugged independence. To some degree it is, but Switzerland has its share of problems, too. The national pension plan has been running deficits as the population grows older.
Last summer, Swiss voters rejected a pension reform plan that would have strengthened the system by raising the women’s retirement age from 64 to 65 and raising taxes and required worker contributions. These mild changes still went down in flames as 52.7% of voters said no.
Voters around the globe usually want to have their cake and eat it, too. We demand generous benefits but don’t like the price. The Swiss, despite their reputation, appear not so different. Consider this from the Financial Times.
Alain Berset, interior minister, said the No vote was “not easy to interpret” but was “not so far from a majority” and work would begin soon on revised reform proposals.
Bern had sought to spread the burden of changes to the pension system, said Daniel Kalt, chief economist for UBS in Switzerland. “But it’s difficult to find a compromise to which everyone can say Yes.” The pressure for reform was “not yet high enough,” he argued. “Awareness that something has to be done will now increase.”
That describes most of the world’s attitude. Both politicians and voters ignore the long-term problems they know are coming and think no further ahead than the next election. That quote, “Awareness that something has to be done will now increase,” may be literally true, but there’s a big gap between awareness and motivation—in Switzerland and everywhere else.
Now, the irony is that even with their problems, the UK and Switzerland are better off than much of Europe. They actually have mandatory pre-funding with private management and modest public safety nets, along with Denmark, the Netherlands, Sweden, Poland, and Hungary.
(Sidebar: Low or negative rates in all those countries make it almost impossible for their private pension funds to come anywhere close to meeting their mandates without large annual contributions for those companies or insurance sponsors, which reduce earnings. And many are required by law to invest in government bonds with either negligible or negative returns.)
Conversely, France, Belgium, Germany, Austria, and Spain are all Pay-As-You-Go countries (PAYG), with nothing saved in the public coffers for future pension obligations. Pension benefits come out of the general budget each year. The crisis is quite predictable because the number of retirees is growing while the number of workers paying into the general budget falls. Further, falling fertility in these countries makes the demographic realities even more difficult.

Debase as Necessary

Spain bounced back from recent crises more vigorously than some of its Mediterranean peers like Greece. That’s also true of its national pension plan, which actually had a surplus until recently. Unfortunately, the government “borrowed” some of that surplus for other purposes and it will soon become a sizable deficit.
The irony here is that, just like the US, Spain’s program is called Social Security, but like our version, is neither social nor secure. Both governments have raided supposedly sacrosanct retirement schemes, and both use those savings for whatever the political winds favor.
Spain has 1.1 million more pensioners than just 10 years ago, and as the Baby Boom generation retires, it will have even more. Unemployment as high as 25% among younger workers doesn’t help, either.
Of the two, the US is in “better” shape, mainly because we control our own currency and can debase it as necessary to keep the government afloat. US Social Security checks will always clear even if they don’t buy as much. Spain doesn’t have that advantage if it stays tied to the euro currency. That’s one reason the eurozone could eventually spin apart.
In at least some of those pay-as-you-go countries, public pension plans allow early retirement at age 60 or below. The contribution rate by workers is generally less than 25%.
Worse, some governments pay retirees more than they made while actually working. This OECD chart shows pension benefits as a percentage of working wages. It is more than 100% in Croatia, Turkey, and the Netherlands, and above 90% in Italy and Portugal.

I am sorry, but there is simply no way this can continue. These governments have legislated rainbows and unicorns. They will not deliver such benefits, unless it is because wages and benefit payments crash to unimaginably low levels.
A rather bleak Wall Street Journal special report focused on the formidable demographic challenges. Europe’s population of pensioners, already the largest in the world, continues to grow. Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers. This will rise to 65 per 100 by 2060, the European Union’s data agency says. By comparison, the US has 24 non-working people 65 or over per 100 workers, says the Bureau of Labor Statistics, which doesn’t have a projection for 2060.
Unlike most European financial stories, this isn’t a north-south problem. Austria and Slovenia face difficult demographic challenges right along with Greece. This WSJ chart compares the share of Europe’s population 65 years and older to other regions, and then the share of population of workers between 20 and 64.

These are ugly statistics.


Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, average life expectancies have risen from around 69 to roughly 80 years.
In Poland, birthrates are even lower, and there the demographic disconnect is compounded by emigration. Taking advantage of the EU’s freedom of movement, many working-age Polish youth leave for other countries in search of higher pay. A paper published by the Polish central bank forecasts that by 2030, a quarter of Polish women and a fifth of Polish men will be 70 or older.

Everything I read about the pay-as-you-go countries in Europe suggests that they are in a far worse position than the United States. Plus, their economies are stagnant, and the tax burden is already near 50% of GDP.
Moreover, many private pensions are in seriously deep kimchee, too. Low and negative interest rates have devastated the ability to grow assets.

Combined with public pension liabilities, the total cost of meeting the income and healthcare needs of retirees as a percentage of GDP is going to dramatically increase across Europe.
Think about that for a moment. I am not talking about as a percentage of tax revenues. I am talking about as a percentage of GDP that in Belgium will be 18% in about 30 years. Which would be 40–50% of total tax revenues. That doesn’t leave much for other budgetary items. Greece, Italy, Spain? Not far behind…


Source: Citi GPS

Some research makes the above numbers seem optimistic. Most European economies are already massively in debt and have high tax rates. And those in the eurozone can’t print their own currency.
French President Emmanuel Macron and a few others seem to be laying the foundations for the mutualization of all eurozone debt, which I assume will end up on the ECB balance sheet. However, that still doesn’t deal with the unfunded liabilities. Do they just run up more debt? It seems like the plan is to kick the can down the road a little bit further, which Europe is becoming good at.
In this next chart, the line going through each of the countries shows their pension debt as a percentage of GDP. Italy is already over 150%. And this is an older chart. A newer chart would just be uglier.


Source: Citi GPS

This problem is far bigger than even the most disciplined, future-focused governments and businesses can easily handle. It is not limited to any one country or continent. The problem exists everywhere, differing only in severity and details.

Magical Thinking

Look what we’re trying to do in both the US and Europe. We think a growing number of people can spend 35–40 years working and saving, then stop working and go on for another 20-30-40 years at the same comfort level, all while fewer workers pay into the system each year. I’m sorry, but that is magical thinking at its worst. It is not what the earliest retirement schemes envisioned at all. They tried to provide for the relatively small number of elderly people who were unable to work. Life expectancies were such that most workers would not reach that point, or at least live only a few years between retirement and death.
The simple fact is that the extended family, which was the source of support for those who were lucky enough to reach old age, has disappeared. As life expectancy has increased and the size of families shrunk since 1950, government has become the paternal/maternal caretaker of those who have reached the magical age 65.
As I’ve pointed out in past letters, when Franklin Roosevelt created Social Security for people over 65, life expectancy was roughly around 56. US retirement age would now be around 82 if the retirement age had kept up with life expectancy. Try and sell that to voters.
Worse, generations of politicians have convinced the public that not only is this possible, it is guaranteed. Many believe it themselves. They aren’t lying so much as just ignoring reality. But it does get them votes. They often outbid each other in political races to be the most generous. That’s not just at the federal level. It is more often seen at the local level promising ever more generous public services while filling all the potholes, too. They’ve made promises they can’t possibly keep, but the public arranges their lives assuming the impossible will happen. It won’t.
How do we get out of this? We’re all going to make a big adjustment. If the longevity breakthroughs I expect happen soon (as in the next 10–15 years), we may be able to do it with less pain, but it is still going to require large and significant lifestyle changes. Retirement will be shorter but better, because we’ll be healthier.
That’s the best case, and I think we have a fair chance of seeing it, but not without a lot of adjustment first. How we get through that process is the most important question.
I’m not optimistic because compromise is becoming a lost art. Politics in both the US and much of Europe is an echo chamber where we mostly talk to ourselves and those who are like-minded. We ignore the other side, treating them as socially unacceptable lepers. We have lost the ability to disagree amicably and rationally. Not so long ago, Ronald Reagan and Tip O’Neill could sit down and work on Social Security. Bill Clinton and Newt Gingrich could sit down and not only modify welfare but balance the budget. Those days are gone.
When some librarians think the children’s books by Dr. Seuss are racist and therefore unacceptable for a public library, the quality of civil discourse is spiraling rapidly downward.
I do not like that, Sam I am.

St. Louis, Los Angeles, Grand Lake Streams, Maine, Beaver Creek, and Boston

So much for staying home in June and July. I’m doing a one-day trip to St. Louis on Monday, then to LA in the middle of July to talk about the future of social organization with somebody I have long wanted to meet. Then I have the annual economics/fishing trip to Maine, then a board meeting with Ashford Inc. at the Beaver Creek Park Hyatt, where Shane and I will take an extended vacation, and then a trip to Boston to visit with friends in the area.
My twins and their husbands are coming down next weekend to be with dad on their birthday, and they are getting the entire family together for sushi one night. I’m really looking forward to that.
I struggled with this letter a little bit, as there is so much else I wanted to talk about. So many countries that have their own nuances that could fill a book, but my partners are trying to get me to write shorter letters, not longer.
The truth is, retirement is going to be a problem everywhere. I left a longer piece on the cutting room floor about why extended lifespans are not going to be a problem, which I know many readers find hard to accept. But this is just one letter of seven (so far) of what will likely be at least a ten-part series. There are so many aspects to the debt crisis. I know we talked about pension problems in terms of 2050, but we will have to resolve these issues long before then.
From a long-term perspective, this may be good news. The crisis will force us to face reality. It will be painful, but we know about it in advance. That means we can plan for it, and I really have a passion for helping people get through The Great Reset. We are all in this together.
And with that, let me hit the send button. I want to wish you a great week.

These next few months will be a period of big change for Shane and I—all the while, I am trying to write my book. But as Shane says, it’s all a new adventure!
Your wanting that book gorilla off his back analyst,

John Mauldin
Chairman, Mauldin Economics

How democracy dies

Lessons from the rise of strongmen in weak states

The greatest risk to pluralism is in young democracies where checks and balances are not yet robust

IS DEMOCRACY in trouble? Nearly 30 years after Francis Fukuyama declared the end of history and the triumph of liberal democracy, this question is no longer outlandish. America, long a beacon of democracy, has a president who tramples on its norms. Xi Jinping is steering authoritarian China towards one-man rule. And across the emerging world, strongmen stride tall. Turkey’s president, Recep Tayyip Erdogan, having locked up or purged more than 200,000 Turks for political reasons, will probably prevail in elections that start on June 24th and assume sultan-like powers. Nicaragua’s regime is pulling out protesters’ toenails. Vladimir Putin is about to reap a huge propaganda coup from the World Cup.

Indices of the health of democracy show alarming deterioration since the financial crisis of 2007-08. One published by The Economist Intelligence Unit, our sister firm, has 89 countries regressing in 2017, compared with only 27 improving. Some surveys find that less than a third of young Americans think it is “essential” to live in a democracy. Small wonder that this year has seen a boom in books with frightening titles such as “How Democracy Ends” and “The People vs. Democracy”.
This pessimism should be put in context. It is a recent reversal after remarkable progress in the second half of the 20th century. In 1941 there were only a dozen democracies; by 2000 only eight countries had never held an election. A broad poll of 38 countries shows that typically four out of five people prefer to live in a democracy. And not all threats to pluralism are of the same order. In mature democracies such as America, strong checks and balances constrain even the most power-hungry president. In immature democracies, such institutions are weaker, so a strongman can undermine them quickly, often without much fuss. That is why the most worrying deterioration, going by both the number of countries and the speed of retreat, is in the fragile, young democracies of the emerging world. From Venezuela to Hungary, these reversals reveal striking similarities (see International section). That suggests reasons for optimism—as well as lessons for the West.

How to undermine a democracy

Put crudely, newish democracies are typically dismantled in four stages. First comes a genuine popular grievance with the status quo and, often, with the liberal elites who are in charge. Hungarians were buffeted by the financial crisis and then terrified by hordes of Syrian refugees passing through en route to Germany. Turkey’s pious Muslim majority felt sidelined by secular elites. Second, would-be strongmen identify enemies for angry voters to blame. Mr Putin talks of a Western conspiracy to humiliate Russia. President Nicolás Maduro blames America for Venezuela’s troubles; Hungary’s prime minister, Viktor Orban, blames George Soros for his country’s. Third, having won power by exploiting fear or discontent, strongmen chisel away at a free press, an impartial justice system and other institutions that form the “liberal” part of liberal democracy—all in the name of thwarting the enemies of the people. They accuse honest judges of malfeasance and replace them with stooges, or unleash tax inspectors on independent television stations and force their owners to sell.

This is the stage of “illiberal democracy”, where individual rights and the rule of law are undermined, but strongmen can still pretend to be democrats since they win free-ish elections. Eventually, in stage four, the erosion of liberal institutions leads to the death of democracy in all but name. Neutral election monitors are muzzled; opposition candidates locked up; districts gerrymandered; constitutions altered; and, in extreme cases, legislatures emasculated.

The battle is not always to the strongman

This process is neither inevitable nor incurable. India has had a vibrant democracy for 70 years; Botswana for more than 50. Deteriorations can be stopped and even reversed. In recent weeks Malaysians voted out Najib Razak and the UMNO party that had ruled since independence; protesters in Armenia broke a decade of one-party rule. Last December South Africans forced out President Jacob Zuma, a would-be strongman who let his cronies loot the state. Even Turkey is not doomed: opposition parties have a good chance of winning control of parliament this month.

It is hard to say which democracies are at risk. Economic stagnation and surges in immigration are often precursors of trouble. But they are neither necessary nor sufficient. Few would have predicted that democracy would totter in Poland, a booming economy with few immigrants that has benefited hugely from European Union membership. More important than the underlying conditions is the degree to which would-be autocrats learn from each other—how to spread fake news, squash pesky journalists and play the populist card. Their weaknesses are remarkably similar, too. From Malaysia to South Africa, strongmen have eventually been felled by popular revulsion at the scale of their corruption.

These similarities hold some lessons. The main one is that institutions matter. Western democracy-promotion has often focused on the quality of elections. In fact, independent judges and noisy journalists are democracy’s first line of defence. Donors and NGOs should redouble their efforts to support the rule of law and a free press, though autocrats will inevitably accuse those whom they help of being foreign agents. The second is that the reversals have been driven by opportunistic strongmen rather than the voters’ embrace of illiberal ideology. That ultimately makes these regimes brittle. When autocrats steal too brazenly, no censor can stop people from knowing—and sometimes booting them out. The last, more uncomfortable lesson is that the example set by mature democracies matters. America’s powerful institutions will constrain President Donald Trump at home. But they do not stop his contempt for democratic norms—the serial lying, the cosying with dictators—from giving cover to would-be autocrats.

Reports of the death of democracy are greatly exaggerated. But the least-bad system of government ever devised is in trouble. It needs defenders.

The Franco-German deal that could derail Europe’s competition police

The proposed merger of Siemens and Alstom’s rail businesses is designed to fight off competition from China

Rochelle Toplensky and Alex Barker in Brussels

Few corporate deals can boast of being brought together with the help of a French president, or promoted as a vision of Europe’s future by a German chancellor. But the proposed merger of the rail operations of Siemens and Alstom to create a European champion has always been about more than pure business sense.

“If we want to be able to face competition with Chinese giants, we have to gather the European forces,” Bruno Le Maire, French finance minister, told the Financial Times. “The best solution was this merger.”

That is if Brussels agrees. Potentially standing in the way of the formation of this European champion is one of the EU’s purest examples of centralised power: the European Commission’s antitrust enforcement arm, led by Margrethe Vestager.

For more than 25 years it has vetted every big cross-border merger in Europe, empowered to block anti-competitive deals. It is institutionally suspicious — if not allergic — to the we-need-scale arguments of “champions”. It prides itself on being the world’s most rigorous — and independent — competition enforcer. And with Siemens-Alstom formally requesting EU approval for the deal last Friday, the merger police of Brussels know a defining test is hurtling towards them.

Rail chart

Rarely if ever has the commission been asked to pass judgment on a big corporate tie-up blessed with such effusive Franco-German political support, nor one that further concentrates what is already an effective duopoly across some of Europe’s rail markets — the combined group has revenues of €16bn.

But the new factor changing the calculus is the looming threat from China’s CRRC, the world’s biggest train maker. Indeed, the Siemens-Alstom deal comes at a time of deep soul-searching in western capitals about the competitive threat from China and its state-backed companies.

The politics surrounding such deals are already shifting, softening the national reservations that long hindered cross-border deals like the Siemens-Alstom tie-up.

The French government seems ready to take on opponents, from left and right, who depict the deal as a sell-off to Germany that puts jobs at risk. Advocates such as Mr Le Maire see the train merger opening a new era for Brussels too, where competition dogma gives way to industrial common sense and another successful Airbus would be created — a pan-European “Railbus” able to go toe-to-toe with China’s CRRC.

A combined Siemens-Alstom group would control 9 per cent of the global railway market, second only to China's CRRC

“This is the redline between those who believe in Europe, and those who believe in national forces,” says Mr Le Maire. “It is only right that Europe’s competition policy should help European champions emerge.”

Angela Merkel is also pressing for change. “We need global champions in various industries and our competition rules do not help us to build these champions,” the German chancellor told a gathering in Munich last week. “We need to reflect.”

Veteran lawyers in Brussels see Ms Vestager caught in a political squeeze.

“This deal should be a clear candidate for prohibition but given the political context, you have to bet it comes through,” says one lawyer involved in the case, noting the importance of the conditions that are likely to be attached to the merger. “The question is how hard the axe falls on different parts of the business. Will it still be a champion then?,” he asks.

French President Emmanuel Macron insists that European champions are necessary to make the continent's companies competitive globally © AFP

Telecoms, steel, stock exchanges, chipmakers, truckmakers: there is barely a sector that has not been touted, at some stage, as European champion material.

In practice, though, few have emerged. As veteran French business journalist Jean-Michel Quatrepoint said: “European industrial policy is like a UFO, much discussed but impossible to describe.”

Successive French presidents have blamed Brussels’ overly-strict competition regime. Yet as the history of Alstom shows, national reservations are also a factor. When the French group was close to a bankruptcy in 2003 and Siemens was ready to swoop, Paris blocked any asset sales to a German group, preferring a state bailout.

Rail chart

The political calculation on a potential Siemens-Alstom deal changed after a different state-engineered champion emerged in Asia. In 2015, Beijing supported the merger of CNR Group and CSR Group, creating the world’s biggest train maker, with nearly 180,000 employees, $33bn in revenue last year and 12 per cent of the global railway market for trains, services and signalling.

If the deal goes through, a combined Siemens-Alstom would generate just half that turnover and account for 9 per cent of the market, with Bombardier, the Canadian group, holding a further 4 per cent, according to SCI Verkehr data.

On the same day last September that the deal was announced, French president Emmanuel Macron gave a speech to a packed audience at the Sorbonne where he said Europe would find strength in “industrial power” and that more consolidation would make the region’s companies competitive “on a global scale”.

 Europe’s most controversial deals — drinks

Brussels approved the £71bn tie-up between brewer AB InBev and its London-listed rival SABMiller in 2016, creating the world’s largest brewer with a roughly one-third share of the global drinks market. The companies agreed to sell off nearly $7bn worth of assets including many household name beer brands to secure the EU’s approval for the deal.

Like other sectors, such as steel and solar panels, the prospect of an avaricious rival bankrolled by Beijing is posing a major challenge to Europe’s incumbents.

CRRC is the dominant supplier to the protected Chinese railway market, the largest in the world; the company is an integral part of Beijing’s Belt and Road Initiative; and it enjoys operational, policy and strategic support from the government.

For an industry already facing a problem of “dramatic overcapacity”, in the words of a 2016 McKinsey report, the danger is even more acute. Rolling stock factories in Asia are 60 per cent under-used, with their European and North American equivalents 40 per cent under capacity.

Rail chart

The changing global picture and China’s competitive challenge are giving the advocates of the Siemens-Alstom deal confidence that it will secure EU merger approval.

“We have a global market and a global market follows global rules,” says Joe Kaeser, chief executive of Siemens.

Across corporate Europe, the argument about the need for more scale is being made forcefully, including from banks, media and defence companies and the telecoms sector, where four US operators compare with around 150 across the EU.

Europe’s most controversial deals — telecoms

Telefónica’s €8.6bn takeover of E-Plus in 2014, creating Germany’s biggest mobile operator in customer terms, became a test case for consolidation, which the industry argues is essential to revive profits. But a tougher approach under Margrethe Vestager led to the withdrawal of the Telenor and TeliaSonera tie-up in Denmark and a veto of CK Hutchison’s £10.5bn attempt to buy O2 in Britain.

Siemens and Alstom may be optimistic about the chances of winning approval. But Mrs Vestager’s competition investigators have very rarely been convinced that markets are truly global, rather than national or regional.

In the Brussels view, companies should not be allowed to dominate national markets at the expense of consumers, just so they can succeed abroad. The efficiencies that come from greater scale are taken into account, but have yet to prove decisive in swaying approvals.

Many lawyers have tried to convince the commission to take a broader view of markets. But as Carles Esteva Mosso, the head of mergers at the commission’s competition directorate, said in 2014: “We cannot choose market definitions as we please, any more than we can change the weather in Brussels.”

A prototype train, built by China's CRRC the biggest railway group in the world, is put through its paces in Zhuzhou city in Hunan Province © EPA

In previous railway mergers, for instance, EU officials looked at nine different markets for rolling stock alone. There were also three distinct markets for wayside equipment, two for signalling and nine for the other systems and services.

Crucially, the commission analysis is typically done at national level, rather than regional or global. Europe’s rail industry still carries the imprint of old state monopolies, which have made it hard for new entrants to break in and win contracts. Siemens and Alstom remain head-to-head competitors in many such markets in western Europe; China’s CRRC, meanwhile, has yet to win a major contract in Europe.

Advocates of the deal argue market share statistics are of limited use because they often turn on big, infrequent tenders for multiyear projects. But the Siemens-Alstom presence is unmistakably strong in some areas, with signalling posing one of the toughest competition challenges.

The group has a 60 per cent share of the European market and a 55 per cent share in North America, according to SCI Verkehr. At a national level in Germany, Denmark and Austria, Siemens-Alstom would be a virtual monopoly.

“The signalling division of the new Siemens-Alstom seems to be very strong,” says Maria Leenen of SCI Verkehr, “it could be very likely that they have to sell parts from the signalling side.”

Rival trainmakers, such as Spain’s Talgo, believe that the issue of “unfair competition” goes beyond signalling, with Siemens-Alstom cementing a protected position in its home markets.

Europe’s most controversial deals — aerospace

 In 1991 the commission exercised its power to block a merger for the first time, preventing the takeover of De Havilland, a Canadian division of Boeing, by France’s Aerospatiale and Italy’s Alenia. Backers had hoped it would spur development of Europe’s aerospace industry, but the commission feared it would create a dominant position in markets for medium-sized commuter aeroplanes.

“As a European competitor, we are concerned that this long protectionist situation may be now exacerbated so that a single company may control all the high-speed rolling stock business opportunities in Germany and France,” the company says.

Other potential issues include the access of rivals to maintenance services and related data, and the question of whether the combined group would cut research and development spending to a level where it threatens innovation.

Supporters of the deal see these arguments as losing sight of the bigger picture. Florent Laroche, a transport expert at the University of Lyon, accepts that the technological legacy of incumbents has seriously constrained access to rail markets. But he argues such fragmentation can only be overcome by a big player driving standardisation.

“The European industry needs a European champion,” he says.

Competition officials bristle at the suggestion that overzealous competition rules have stunted corporate Europe. Many of Europe’s biggest companies reached their size through commission approved mergers, from Vivendi and Daimler to BNP Paribas and Vodafone.

Of almost 7,000 deals notified since 1990, just 27 were blocked. When faced with a potential deal harmful to competition, the usual approach is to seek specific remedies, such as asset sales or promises to restrict business practices.

Such commitments have been required by Brussels in more than 120 deals, with varying degrees of severity. Rivals expect Siemens-Alstom to face such demands, particularly in the signalling business.

“It will have to go, there is no question,” says another lawyer working on the case. “One of the businesses will have to be sold.”

Europe’s most controversial deals — finance

Ms Vestager blocked the merger of the London Stock Exchange Group and Deutsche Börse in 2017, after the groups refused to sell some fixed income clearing assets to address her concerns about the deal creating a de facto monopoly. The proposed merger was the third attempt in 17 years to create an Anglo-German exchange to rival US and Asian competitors.

Asset sales, if required, create a separate dilemma. Any auction may give CRRC a long-sought opportunity to establish itself in Europe — defeating the China-beating reasoning of the merger. “It does seem an own goal,” the lawyer says. “In pure competition terms, why not? But it would look foolish to anyone with a brain.”

This highlights a broader challenge facing the commission. One of its roles is to police Europe’s state aid curbs, which are the strictest in the world. Yet in vetting mergers it is unable to take account of the competitive threat posed by companies enjoying state-support from non-EU countries, such as China.

With strong Franco-German support, the EU is examining reforms to allow for much tougher screening of foreign investments in strategic sectors. But while it may stop Beijing’s encroachment into the EU market, it does not relax the competition regime that European champions must fit to their ambitions.

“When the EU merger regulation was adopted in 1989, the main concern, about foreign takeovers, if any, was not about China but about Japan,” says Sir Philip Lowe, the former head of the commission’s competition department. “There is always some country out there which people think is about to invade the entire European market.”

When Populism Comes Home to Roost

Federico Fubini

Italys Prime Minister Giuseppe Conte looks on during a confidence debate at the Senate

ROME – Debates about the euro usually contain proposals for complex financial arrangements to build “resilience” against the next economic shock. Yet the shock that we are currently witnessing is political. Populists are making gains across the European Union, and Italy, a founding member, is now governed by a Euroskeptic coalition comprising the populist Five Star Movement (M5S) and nationalist League party.

As is always true when anti-establishment forces take power in a G7 or EU country, the question now is what comes next, and whether there is a route back to normalcy. In Italy’s case, it is too soon to tell. But in the meantime, we can reflect on what lessons there may be for Europeans as they attempt to contain the populist tide.

The main lesson is that European countries cannot face down today’s resurgence of populist nationalism and jingoism unless they cooperate. Unfortunately, the response to populist gains so far has been similar to the beggar-thy-neighbor response to protectionism in the 1930s, with each country trying to shift the problem on to others until it comes back to bite everyone.

In 2015, Italy’s then-prime minister, Matteo Renzi, convinced the European Commission that his government needed more “flexibility” for deficit spending in order to keep M5S at bay. This bending of EU budget rules predictably enraged the German public and fueled support for the far-right Alternative für Deutschland (AfD), now the main opposition party in the Bundestag. But, of course, popular anger is also what forced the German government to impose overly strict terms on Greece in 2015, thus inflaming a populist revolt in that country, too.

Likewise, populist anger in the Netherlands and Germany over bank rescues led to the enactment of strict anti-bailout legislation at the EU level after the 2008 financial crisis. But that legislation then prolonged Italy’s credit crunch, which, in turn, fueled populism there.

Then came the start of the refugee crisis, when Italy waved migrants through the Alps, essentially outsourcing the problem to France and Austria. That boosted the electoral prospects of the ultra-nationalist Freedom Party of Austria and the far-right National Front in France.

Eventually Austria and France sealed their own borders, setting the stage for the League to capitalize on public anger over immigration.

Of course, the roots of Italy’s populist turn are also domestic and historical. Owing to the failures of past governments, Italy has not experienced per capita GDP growth for two decades.

And productivity in the service sector – which is the least exposed to global competition – has been stagnant since the 1990s.

These are problems of Italy’s own making. After 1945, Italy reformed its political institutions but failed to make necessary changes to its economy. Though it had moved from dictatorship to democracy, the trappings of the fascist system lived on through a corporatist approach to market regulation and widespread government meddling in finance and industry. Some features of the old system eroded further after 1992, under the Maastricht Treaty, but others persisted.

For example, as a result of centralized wage bargaining, average private-sector compensation is just 6% lower in Italy’s South than in the North, even though the North’s productivity lead over the South is far greater. Under such conditions, there is no good reason to invest anywhere south of Rome, which explains why the region’s per capita GDP has fallen 30% below the eurozone average since 2001. Against this backdrop, it is little wonder that 47% of Southerners voted for M5S, whose proposal for a universal subsidy would well suit an economy held back by fascist-era corporatism.

Corporatism is simply incompatible with a monetary union. Yet it is difficult to reform because of the dependencies it creates. That is why multiple past governments failed to modernize the economy. After Silvio Berlusconi was forced out of the premiership in 2011, the technocrat Mario Monti did take some action, but in the run-up to the election, progress slowed to a halt.

Renzi, too, pursued limited reforms, but eventually fell prey to his own outsize ego.

But even with more effective leaders, Italy would have faced EU headwinds. The conservative fiscal response to the post-2008 recession, combined with the European Central Bank’s dithering before July 2012, led to excessive austerity, which wreaked havoc on the Italian middle class, pushing it toward populism. When Monti took office in November 2011, M5S and the Northern League (as it was then called) were polling below 10% combined; today, that figure is well above 50%.

Italy spent a fraction of what many other advanced economies marshaled (as a share of GDP) to bail out banks after the 2008 crisis. But its abrupt bank “bail-in” in 2015 forced small savers to take a loss, and boosted M5S just as its fortunes were flagging. In hindsight, ordinary Italians’ financial losses, coupled with the sentiment that the EU had left them to deal with the refugee crisis on their own, made the populist backlash all but inevitable.

Italy’s political situation shows how toxic Europe’s approach to populism has become. As mainstream politicians across the EU try to protect their flanks against domestic populist threats, the defenses they mount stoke populism in neighboring countries. The result is a domino effect, which has become the main threat to the future of the euro and the EU.

Mainstream politicians have failed to come together to combat populism because they are focused wholly on their own careers and the next election. But, sooner or later, they must realize that a beggar-thy-neighbor strategy will always come back to haunt them in the end.

That is why Italy, like Greece in 2015, could soon pose a threat to all of Europe.

Federico Fubini is a financial columnist and the author of Noi siamo la rivoluzione (We are the revolution).