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Pushkin.

Hola, buenos dias, y bienvenido al podcast Unhedged del FT y Pushkin en Madrid.

The

Unhedged podcast has been let loose on the world, and we're making the most of it.

So, welcome to the second installment of our humble podcast recorded at the IE Business School in the Spanish capital with an audience and everything.

I'm Katie Martin, a markets columnist and an extremely bad Spanish speaker.

I can just about order a café con leche or una servea and that's about it.

I'm joined by a double whammy.

We have Rob Armstrong from the Unhedged Newsletter in New York and he's doing pretty well for a man who got the red eye over yesterday from the States.

Hola.

Hola, que tal.

But also, we're joined by Barney Jobson.

He was my colleague in London for a while.

And mine in New York.

Yeah.

But now he's the FT's man in Madrid, which I'm going to say is quite a sweet gig.

Yeah, it really is.

It really is.

Great to be here with you.

So, listeners, if you get confused, Rob is the massive brash American.

Barney is the infinitely wiser-sounding guy with an English accent.

So

that should keep you straight.

What we're actually going to talk about today is this extraordinary display of European unity that's come not out of nowhere, but as a direct response to what's been happening on the geopolitical stage with Donald Trump, with the situation in Ukraine, European markets are having an absolutely scorching run, in stark contrast to what's been going on in the US.

This is like not how the world works at all.

This is not what we've witnessed, you know, pretty much ever in the past sort of 20 years that I've been looking at markets.

So, Barney, tell us.

You've been over in Spain for, what is it, two and a half years now over here.

How is Trump 2.0 viewed from over here?

Well, let's talk about the defense side of things first.

One reason for the changes that you mentioned there is that Europe is petrified that Trump is about to pull away the U.S.

defense shield that has protected this continent for so many decades.

And that's led to the erasing of all kinds of red lines.

It's led to the sacrificing of sacred cows because Europe has realised that, holy cow, we need to do something different to defend ourselves.

That's got a whole bunch of implications.

One is that Germany said it's going to throw off the fiscal shackles and start spending whatever it takes to boost its own defence industry.

You've got the European Commission talking about raising $150 billion to lend to member states so they can invest in their own defence.

It's led to defence stocks soaring in Europe this year precisely because they're the ones, they're the companies that are going to get the bonanza of an increase in defence spending.

So that's just one side of it, but that's just changed everything in a space of a couple of months.

Yeah, no, absolutely.

And I was looking at a really cool chart the other day from SP, the rating agency, and it charts how close a country is in Europe to Moscow against its defence spending.

And so if you're so the Baltic states and Poland spend a huge amount of money on defense.

So you're talking like somewhere between 3.5% and 4% of GDP they spend on defence.

Now the further away you get from Moscow, the less and less and less you spend on defence.

Spain and Portugal are not

fulfilling their part of the bargain here.

So

is there an acceptance in the Spanish corridors of power that something's got to change here and that you need a new defense strategy?

Or is there a sort of idea that, look, we're miles away.

Why do we need to worry about this?

You're right that for a long time, Spain and Portugal have been sort of trying to hide in the corner, hoping they don't get noticed.

But they now have been noticed by you and everyone else.

I mean, just to put some figures on it, the NATO target is that members should be spending 2% of GDP on defence.

Spain last year spent only 1.3%.

So it's a long way away.

It's got a long way to go.

And now NATO is talking about lifting that target from 2% to 3%.

So it's even further away.

The realization that something needs to be done in Spain has dawned, but for a host of political and historical reasons, you can't just click your fingers and change.

So, the Prime Minister here, Pedro Sanchez, is talking very gingerly about the fact that yes, we need to act, yes, we're good Europeans, yes, we're going to support Ukraine, but that has not yet resulted in a meaningful pledge to increase defence spending.

It has not yet changed his policy on how to support the defence industry.

Because

if he moves too fast, it will trigger a backlash from members of his own governing coalition and from some people on the streets in this country, which is still largely anti-war and pretty pacifist.

I mean, your comment there, Barney, kind of raises my main question about what we've seen in markets here.

There's been almost this euphoric response to the idea that Europe is going to change its attitude towards defense and it's going to spend more money.

But this sounds much more ambiguous to me than the markets seem to be reading it as, both on the spending side and the military side.

Is your feeling that the markets have kind of gotten ahead of themselves, the Euro, European stocks, you know, is is is it all is it ignoring a political realities we should be kind of alert to?

It's still very early days and and maybe markets are not appreciating that.

I do think the the sort of the end of the German debt break, Germany's willingness to do whatever it takes on defence is a huge deal that merited a sort of a change in the calculus.

However, let's think through the stages that need to happen.

First, if Europe's going to increase its defense spending, all the countries need to agree to do that.

And as I've just said about Spain, they haven't agreed to do that.

Second, once they've got the money, they need to coordinate on how it's going to be spent.

So you make sure that a munitions factory in southern Spain is building munitions that can fit into a missile launcher built in Germany, right?

And once you've coordinated, then the third stage is helping to ensure those companies can actually increase their capacity, which doesn't happen overnight.

You can't just open a bunch of factories from one day to the next.

So, we're very early days.

Maybe the market is getting ahead of itself because there's a lot more hurdles to cross over.

Yep.

One thing that we keep hearing at the moment is that one trick that Germany can play is that it can turn all of its car factories that are not succeeding terribly well at selling their cars into tank factories.

Does Spain have a large part of its manufacturing industry that it could turn to defence if it really wanted to?

And is there a kind of groundswell of support for doing that?

So, Spain is in a similar position to Germany.

It's the second biggest car producer in Europe, but some of those factories are lying empty.

I was in Barcelona last week, which is one of the big car producers, and precisely this idea came up: let's convert these factories in into defence.

For now, I think it's an idea circulating among the sort of the intelligentsia, the think tanks.

It's not a discussion or an idea that's reached the streets, partly because, again, the Prime Minister does not want people to be thinking this far ahead because he fears that if he moves too quickly in turning Spain into a defense.

Can he come run America?

Can he come and run America?

Yeah, well, he might be a little too left-wing for the average American producer, I think.

I'm going to ask another dumb American question here.

I focus very much on the American market and the American economy, as you both know, in my work.

But it seems to me that Europe has shortages, but a debt shortage is not something that it had.

How do I untangle that knot?

We have this very positive response in markets to the news that there will be more debt on countries that are already struggling with their debt levels.

How does that work?

I mean, there's no sensible argument that Germany is struggling with its debt levels.

Okay, that's fair enough.

Right.

So it's prepared to borrow a lot more.

We had a piece in the FT the other day suggesting that Germany can spend 2 trillion euros extra over the next decade without harming the economy.

So Germany is starting from such a low base in terms of its borrowing.

That's why, yes, you saw German bond yields pick up, right?

So, you saw the bonds fall in price, which meant that the yields went up, which is normally the market's way of saying, Oh, we don't like this, it's too much borrowing.

But at the same time, you had the Euro gaining in value and you had German stocks absolutely racing higher.

So, the market is not saying, hell's teeth, this is too much spending, you've got to stop it right now.

The market is saying, carry on

as you were.

Real growth expectations drive bond yields up.

Yeah, So you're going to have more inflation, you're going to have more growth.

This is, you know, spending on defense is fiscal stimulus, and people often lose sight of this.

So that's

one way of viewing this.

But Spain is in a somewhat different position, right?

It does have higher debt to GDP levels.

So can Spain borrow its way out of this situation that's imposed on it on its own?

Or the really big question, the really big prize is: does the EU pool resources and borrow as one bigger entity?

Again, is there political will for that?

So Spain would very much like pan-European borrowing or pan-European funding, partly because if everything's pooled, it gets a better interest rate on its debt.

So Spain is pushing for a pan-European financing solution.

Italy is pushing for a pan-European financing solution.

As is often the case in these debates, Germany, despite the change in fiscal policy, Germany and France are reluctant.

This touches on the point you made in the last show, Katie, which is that is there an alternative to the dollar as a world currency?

A Euro with a common financing mechanism has taken a big step in being, I mean,

whenever you say to people, there is a world beyond the dollar for the global financial system.

And what they respond to you is, what are you going to buy?

The Euro?

You know?

But if you have a common financing system, and even beyond that, you have more financial integration, you have a more integrated banking system.

Suddenly, you have a currency on your hands, a proper global currency.

That could be a huge change.

Yeah, because the big problem with using the Euro as a reserve currency to rival the US dollar is the German government bond market, or the Spanish government bond market, or Italian, or French, or whatever it is, no one of them is simultaneously large and safe enough to accommodate all of those flows.

So, if you're a really big reserve manager at a central bank or a sovereign wealth fund or whatever it is, you want to dart in and out of a bond market, the only one that is big enough to absorb that flow without you leaving a huge mark on the market is Uncle Sam, is the US government bond market.

But all I'm saying is, I can see a situation five, ten years from now where Europe is forced into a situation where it pulls all of its bonds.

And

it could take that role.

And I know that's a bit kind of pie in the sky, kind of Eurocrat stuff to say, but I think it could actually happen this time.

I mean, Barney, do you get the sense that Madrid is taking this role of a combined European force for good seriously?

It is, and Spain's acting with a bit more confidence.

The economy in Spain was the fastest-growing big economy in the world last year, still growing pretty well now.

That's given Spain a bit of swagger, so it's at the table in Europe presenting ideas about sort of common financing in a way it didn't before.

It has Portugal behind it, Italy with some nuances is behind it.

So

the strength of southern European economies is giving them a bit more heft in these negotiations.

Okay, I'm going to try to ruin this nice happy story that we're telling here.

The old joke, sort of 10 years ago or a little more, in the Eurozone crisis, the joke was, you know, what is Europe?

It's Greece's economy with Germany's currency,

which was a disaster.

You needed currency weakening, but you couldn't do it because you had Germany in the mix.

And now, yes, it's wonderful for for Germany to have higher bond yields.

They signal an increase in real growth prospects.

I agree with you, not excessive spending.

But the rest of Europe has to eat those bond yields too.

It forces everything up.

Every bond.

So if you're a peripheral country in Europe, one that's not in such a fiscal situation, suddenly you have Greece's economy and you have Germany's bond yields.

Right?

And so it's harder for you to borrow.

And it may get worse.

Again, I'm just playing the devil's advocate here.

It gets worse if there's a common European debt.

That's going to crowd out maybe French bonds, maybe Spanish bonds, maybe whatever.

So this could go badly the wrong direction.

Right?

Don't you think?

But it's not obvious to me that Europe has another choice at this point.

You know, it's got to step up defence spending.

None of the national government bond markets is big enough to do this on its own.

So necessity is the mother of invention.

I mean, Barney, what are you hearing in Madrid?

Well, look, I think it's going to happen one way or another.

The mechanism through which it happens is still to be decided.

Just one little side note: I think France's, sorry, France's borrowing cost is actually higher than Spain's right now.

That tells you partly how things have flipped in Europe.

So, some of those contradictions are not quite as they used to be.

But, yeah, look, this money is going to come from somewhere because it has to.

Because the alternative, and Rob, this is part of the answer to your question about why markets have risen so much.

The alternative is that Europe can't defend itself, it's abandoned by Trump, and Putin, to use a phrase Trump once said, can do whatever the hell he likes with the continent, right?

Yes.

If Europe gets its act together, if it can defend itself, well, then thank God we can feel a bit safer.

And I think that's part of the reason, emotional as it is, for the fact that markets have gone up here.

Another opportunity for us to be mean to Americans is for decades the European defense sector has relied on bits from the US.

So it's relied heavily on US defence equipment.

The FT has been reporting about this recently.

Now, European capitals and European defence ministers are saying, we can't do this anymore.

We can't buy American kit because we don't know.

You'll turn it off.

You'll turn it off.

It's unbelievable that we're even having this conversation.

So there's a big gap in performance between US and European markets.

European markets are doing much better than the US so far this year.

But European defence stocks are absolutely racing high.

And

the US is going to discover quite quickly that its defense sector is one of its export jewels in the crown.

And you know, congratulations, you played yourself.

I asked a professor here over lunch about how quickly that conversion can happen.

And it's extremely hard to say.

He said, and he said it for the exact reason that you pointed out.

It's a coordination game.

Actually turning one factory into another kind of factory, not that hard.

Deciding for a heterogeneous group of nations where the factory is going to be, who's going to make what, what are the standards going to be, whose money is going to be used, that is something that takes time to work out.

You can't just start...

you get just can't have money and just magic up missiles or carriers or for that matter kit for soldiers or soldiers themselves that's a question i wanted to ask you before you even make your comment is

do people want to be soldiers in spain or anywhere else in europe I don't think anyone's going to vote for conscription here or anywhere else, right?

I mean, this is we've seen what Ukraine's had to do to get soldiers onto the front lines.

It's conscripting people who are 50, 60 even, Russia as well.

Nobody in Spain or Europe wants to get involved in that.

So, yeah, the manpower.

You would look great in uniform, Barnard.

Yeah, exactly.

What I wanted to say is that

ramping up production of tanks and munitions is one thing.

That's kind of like dumb material.

Where Europe is especially dependent on the US

is with something called strategic enablers.

Remember that phrase, it sounds very obscure.

Strategic enablers are the things that the technology the Americans have that enable you to run a military campaign.

It's like air-to-air refueling.

The Americans can do it, the Europeans can't.

Yes.

It's the communications and the radar systems that you need to get your jets talking to each other, that you need to kind of direct people on the ground.

The Americans have that, the Europeans don't have that.

So yeah, turning out more tanks is one thing, but they also need to develop the know-how in Europe to develop this kit which you need to run a campaign.

Yeah.

Look, we're in a room full of young people.

I mean, would you be willing to put boots on the ground in Ukraine?

Put your hands up if you are.

One.

Good lad.

Good man.

That is not a huge groundswell of support for this.

But again, like Madrid is just so far from this Eastern bulk.

We're not talking about necessarily a war.

The point of increasing the size of your forces is precisely so you don't have to send soldiers to the Ukraine.

But if there's a peace deal, there will be a peacekeeping force.

And

Spain and others need to send troops to the peacekeeping force.

Can I change the tenor of this conversation slightly?

You can.

And

we can turn it back later.

We've heard a lot of talk from the likes of Mario Draghi about European competitiveness.

And it feels to me if this immense rally in markets is going to be backed up

If that surge in market sentiment is going to be backed up by economic activity,

Europe has to to become more competitive as an economy.

And people have been talking this way for a long time.

It's a hard thing to do.

We Americans look at Europe and see a place that's just miserably over-regulated, can't get out of its own way.

Oh yeah?

Well, you know, all of this is true.

We all can't get it.

Exactly.

And we're bad in football and everything else.

But similar to the question about is there

feeling that a different world militarily is possible, is a different world economically possible?

A less regulated, more competitive, more free market, less internal barriers, even inside of the single market?

I think that's really hard.

I mean, in a lot of European countries, Spain is one of them.

The bureaucracy is so crushing, both in government and actually in business.

Many big Spanish businesses are incredibly bureaucratic, and that stifles innovation.

This is not a great country for creating a startup.

It happens.

There are some successful startups here, but it's not for foreign ground.

And changing the bureaucracy is just a terribly difficult task.

I wonder how many students at this school plan to go work in America when they're done.

Anyone planning to go off to America when you get out?

More Americans than soldiers, I notice.

Any freedom that you want to have economically is bought by productivity.

You know, this is the old line.

Productivity isn't everything, but it's almost everything.

And if you're a more competitive, more productive economy, you have more choices.

What to spend on, you know, how to live live your life, debt, not debt.

Everything is easier when productivity is higher.

And as it goes down, every decision gets more difficult.

Because when there's no productivity growth, everything is a zero-sum game.

Everybody's fight, it's just a fight over the ungrowing pie.

And so...

But Rob, let's ask Barney one last question here.

The call for European cohesion is strong.

It's stronger than I've ever known it to be before.

Do you think that the EU and Spain within it, have they got the guts for this fight?

Are they going to do this or is this effort going to dissolve in arguments like it normally does?

I think they're sufficiently scared of Putin that they will get it together.

It won't happen quickly, but they'll get it together because the alternative is worse.

Yeah.

All right.

Listen, we are going to go to a very short break and then we're going to be back with questions from the audience.

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Listeners, welcome back to Unhedged here at IE Business School in Madrid.

We're taking questions from our lovely audience.

My name is Nicolas.

I'm from the Bachelor in Economics at SEMBRIKE.

And I was wondering, you were previously discussing on the current financial situation in the US and how the markets are currently struggling.

In the scenario that this continues to go on, how can Europe capitalize on this, let's say, struggle that the American economy is going through in order to step up in the global economy?

Be a traitor, Rob.

Tell Europe how to take the U.S.

down.

Well, as we talked a little bit in the last show about how it is very unpredictable how the Trump administration will respond to a sustained weak market, not this little baby cute weak market we're having right now.

I mean, a real bad one.

But I would predict

that will

weaken his hold on the electorate.

A Trump with a bond market and a stock market that is in trouble is a less politically powerful Trump.

Remember, in the House of Representatives and in the Senate, he has a very slim majority.

There is going to be more room to negotiate to the degree U.S.

markets are in real distress.

I'm not predicting that's going to happen.

I hope that it will not happen.

But this is Trump.

We're talking about a negotiation.

We're talking about deals.

It's going to be easier to strike a deal.

How's that for a guess?

Yeah, right.

That will do nicely.

Let's have the next question that we're not going to know the answer to.

Hello, my name is Eduardo.

I'm a first-year student in the dual degree of business administration and international relations.

My question is sort of related to inflation.

So last week, the ECB cut rates to 2.5%, sort of been the lowest that it's been in over three years, more or less.

There's sort of been five to six almost successive rate cuts in the past year.

And Isabel Schnabel from the ECB came out last week as well and said that she believed the ECB might still overshoot the target considering all of this growth that the EU is seeing.

What do you think this impact will have on the Eurozone economy, on growth?

And sort of simultaneously, how long do you think this boom in European stocks is going to last?

And can it sort of close the gap that it's had with the US on growth?

God, these young people ask good questions, don't they?

What the hell?

You raise a very important issue here, and one thing that the European Central Bank was at pains to say at its last conference was: we are meeting to meeting, data point to data point here.

They are not making any effort to predict the future because that's a total mugs game at the moment.

So,

I think they're going to be flexible.

I think you will get the usual pushback to higher inflation from countries like Germany and less resistance to it in Spain, Greece, and other places.

But, you know, the European Central Bank is not going to do anything to fight against what you're seeing happening in European stock markets, certainly.

I think it's pretty comfortable even with where bond yields are, but they're not going to want to see inflation get out of control.

But they will be very happy to see inflation that is sort of the cousin of higher growth.

They don't want to see inflation kind of run away on its own.

I think they're actually in quite a good spot now.

They've still got room to cut rates further.

They're being quite nimble in terms of how they're reacting to the data.

I don't know, Barney, what are you picking up from here?

Spain is in a relatively happy place.

Spain's inflation has been lower than the rest of Europe for a while, partly because energy costs here are lower, which is a lot to do with renewables.

So it's not an issue on people's minds here as much as in other countries.

I am a guy who thinks that we didn't just have an inflationary incident.

I believe the neutral rate of interest globally has gone up.

and that

we live in a more inflationary world for a whole list of reasons I won't go into.

you.

So I will tell you, I don't think we had pandemic inflation.

I think the inflation is with us now, and we're going to have to be more vigilant forever.

For your lifetime, for my lifetime,

the uninflationary period of the last 10 or 15 years was the historical anomaly.

It is over.

Yeah, totally.

Totally.

Thank you so much for your question.

My God, we've got so many questions coming in.

This is great.

Makes me feel easy.

It makes it easier to get it.

It makes me feel extremely important.

My name is Sharit.

I'm currently doing my MBA, just started actually.

So my question, in line with a lot of your previous topics discussed over here, is also going to be concerning the current devaluing of relations with China.

Regarding how the U.S.

is currently imposing tariffs on China, do you see the EU play a bigger role with regards to relations with China?

What kind of a new dynamic do you see at play over here, especially with regards to China's willingness to increase their expenditure spending on the One Belt, One Door Initiative and increase their foothold in Europe?

I specifically requested an easier question than

I can say something about EU-China policy.

Yes, yes.

There isn't one.

That's my top line.

There isn't an EU-China policy because there's so much division amongst member states on how close or how cautious we should be with China.

Spain is one of the more pro-Chinese countries in the sense that it's eager to get investment.

It wants investment for cars in particular.

It knows that China's got the car technology.

So Spain and its Prime Minister has been currying favor with China in a way that's caused some unease in other capital cities.

So there's not a unified China policy and different countries are pulling in different directions.

But everyone needs some Chinese investment, that's for sure.

In a way, you've put your finger on the second most important policy question in Europe.

The first policy question is, of course, military.

The second policy question is what is Europe's relationship with China.

I think that's a hard decision.

This is is why I'm glad I'm a journalist and not a real person.

Just to make these decisions.

Yeah, we just get to

talk it over.

Thank you so much for your questions.

Thank you so much.

Okay, last question.

Here we go.

Yeah, I guess I'm the last one.

My name is David Bickford.

I want to get your gut feeling on the sustainability pursuits in Europe.

Do you think companies in Europe are going to ditch that pursuit?

Or we've seen that with PP

sort of changing its core.

There's also a bit of pressure in America, ditching that pursuit.

Do you think they'll stop or decrease the speed that they're going with?

It's a really interesting question, and I get that a lot.

It's around, you know, so the US is like just setting fire to diversity programs and setting fire to sustainability initiatives, at least in public.

There's a lot of that stuff that's still going on in corporate America that's just been rebadged or kind of hushed up, that's actually still happening.

I don't detect anywhere near the same degree of allergy in Europe and the UK to diversity and sustainability initiatives.

If anything, you know, we had a story about this just the other week.

There was a big UK pension scheme, and it ditched its investment manager specifically because they had ditched ESG.

And so, you know, pension money, insurance money in the UK and Europe wants ESG and DEI, and they couldn't care less what the the policy is in the states.

So I think we're going to see quite a marked divergence between the two.

I don't think Europe wants to give up that agenda at all, and they're not spooked by the fact that the US is.

I mean, Barney, what's your experience?

I agree.

As long as the far right in Europe is not in power or not in coalition governments, I think the mainstream view will be to push ahead with sustainability with one caveat, which is that ESG funds used to stay clear of defence.

Now, defence is the place to go.

So you might see some redefinition of what ESG means to include some defense.

This was absolutely a core issue with ESG, is nobody knew what it meant.

Maybe

we're rethinking that in an interesting and dynamic way.

There's a lot of money that has not gone into defence stocks over the past 20 years because of ESG programmes that is now having a big rethink and heading in.

I think that's very healthy and a really big shift.

Right.

Well, we had an amazing run of questions there.

Thank you so much.

Give yourselves a round of applause.

Okay, one more last quick thing.

As I said last time, it is not the Unhedged podcast without long short.

Rob, stop coughing and tell us.

You've got to stay alive for this one last period.

All right.

Long a thing we love, short a thing we hate.

What do you got?

I think the European Defense Trade has room to run.

Uh-huh.

So you're long European Defense?

I like the European Defence stocks.

I think it's just getting started.

That's a long-term trade.

Yeah.

Good one.

Very sensible.

Yeah.

Right on.

Barney, have you prepared for this, or is this a big surprise to you?

But I just thought it was.

It doesn't have to be a business even.

It can be any old thing.

We were long eels in the last one.

I'm going to go long renewables.

This is a success story in Spain.

Gets 50% of its energy from renewables.

Wants to get to 80%

by 2030.

So there we go.

I'm going to go long renewables.

And I will go short the aforementioned government bureaucracy,

which is not great.

It's not great for your innovation.

Yeah.

I am still short crypto.

There was a note out the other day from Cliff Asnes, who is a fund manager of some repute.

He's been in this business for a very long time and he called it a dangerous boondoggle.

And I agree with him.

He's specifically writing about the.

This is such a testament to the quality of this school that we didn't get Bitcoin questions.

No Bitcoin questions?

Yay!

Yes, so read Cliff Asnes.

I agree with him, and it's never worth disagreeing with Cliff Asnes because he can get really grumpy with this.

He's so grumpy on the phone.

Yes, so grumpy.

But he's right about this.

Okay, that wraps up our

adventure of Spanish podcast recordings.

We've been made incredibly welcome by IE Business School.

We've been having a lovely time.

So muchas gracias.

Hope we can do this again.

Thank you all so much.

Unhedged is produced by Jake Harper and edited by Brian Erstad.

Our executive producer is Jacob Goldstein.

We had additional help from Topha Foreheads.

Cheryl Brumley is the FT's global head of audio.

Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free.

A 30-day free trial is available to everyone else.

Just go to ft.com/slash/unhedged offer.

I'm Katie Martin.

Thanks for listening.