Are we heading for a new era of nationalizations?

Philippe Waechter -

The Dutch government has just shelled out $775million and is now the proud owner of close to 13% of the Air France – KLM group, reflecting its determination to get back on an equal footing with the French government in the airline group.

The Dutch government felt that KLM had recently been badly treated within the group when the new chairman was appointed…and the battle of wills is even more fierce and surprising when we realize that the Netherlands took its stake without informing the French government. More recently, Bloomberg announced the possible renationalization of EDF with the aim of better managing this strategic energy business in France, while Germany is willing to bail out Deutsche Bank if the bank gets into severe trouble.

There is very clearly a shift in government policy on the state’s role in companies’ shareholder structures, with a feeling of the re-emergence of the State as strategist. This idea had somewhat disappeared from our textbooks, but now seems to be coming back to the fore.

Over recent years, nationalizations have usually been temporary. This was the case for General Motors in the USA in 2009, as well as for UK banks at the height of the financial crisis. There is also the example of STX in France, and the matter is on the table again with Ford and Ascoval.

Globalization is no longer seen as the systematic solution

Globalization was set against a backdrop of an open world over the past twenty years, with resources allocated efficiently. This worked well as developing countries focused on industry, especially Asia, while developed countries concentrated on services and the intellectual resources required to supply the industrial sector. This allocation of resources can be immensely effective if all participants play by the rules and if each country feels it is benefiting from the arrangement.

One reason behind this change currently under way is that the world economy is no longer seen as cooperative. At the time of the Brexit referendum, the UK indicated that it would be better off outside the European framework than within, while at the same time elsewhere in the world, Trump and Xi Jinping are building a bilateral rather than a multilateral system.

This new world order does not fit with the globalization trend witnessed in a recent past. Trump has taken a more isolationist path than his predecessors, throwing a spanner in the mechanisms of globalization with his border duties and threats. In China, the Belt and Road Initiative demonstrates the country’s determination to build its own trade routes and set its own terms and conditions.

Against this backdrop, previous trends to globalization are changing, and if all participants no longer play by the joint rules of the game, then each country is free to make up its own. This could well be what is happening right now.

Growth is too sluggish

Alongside this explanation, there is also the issue of sluggish growth on developed markets. Some countries want to take matters into their own hands and set their economy back on a stronger trend, and each country wants to be able to do what it takes to get ahead. KLM’s move fits with this approach, as the Dutch government felt it was being excluded from decisions on its own airline KLM, which could potentially be bad for jobs and the Schiphol airport hub in Amsterdam.

Philippe Waechter – Chief Economist – Ostrum Asset Management