Newsmakers and market movers. This is The Pulse with Francine Lacqua. Good morning everyone, I'm Francine Lacqua here in Berlin, and these are your top stories.
The German Chancellor says the entire political order in Europe is at risk from Russia. The French Prime Minister says curfews will come as needed after tougher security measures follow a weekend of violent unrest. The U.K. Chancellor gets a data boost while Bloomberg learns higher capital gains taxes have been ruled out. We are here in Berlin as Germany hosts an investor conference.
This comes as the country encounters tough competition from China, a transatlantic relationship, and political turmoil at home. We did have this rebound in the artificial intelligence trade that sputtered after this dismal debut of a South Korean data center firm that seems to have revived concerns about whether the tech spending boom can last. Down three tenths of a percent, and concerns surrounding this AI-related data center infrastructure investment have also been building for several days.
Leaning heavily on sentiment, probably overshadowing energy prices. You can see Brent crude at 110.57. We look at the data and security concerns following the protests in France. The German Chancellor has warned against complacency and the dangers from Russia, saying Putin is not only seeking to boldly defeat Ukraine but to disrupt Europe.
My biggest concern is the underestimated Russian impact on our societies, which has to do with the war in Ukraine, but this is only a part of the picture. The big picture is that Russia is on the way to destabilizing the entire political order of our European continent. This is obviously underestimated by many people in my country as well, that they don't see what the goal of Russia really is — that this is not only territorial gain in Ukraine, this goes far beyond. And they are fearing democracy, they are fearing open society, the success of European integration, and they want to undermine this success. As I said, many people, including in my own country, are underestimating the threat, which is really there every day.
Is that enabled by the U.S.?
The U.S. is territorially far apart from Russia. This is our continent. Russia, a European country, and this is a European country which is under threat. That's my concern.
The German Chancellor said Europe has the ability to harness its strength and overcome economic gloom as he reinforced plans to boost investment in areas like tech.
We are a big market, 450 million consumers, which is 100 million more than the United States of America. So we have something to offer, and we're at times conscious enough to say, yes, we can catch up, and we will do that.
By investment, by cutting back red tape, which is one of the biggest challenges for us, and by organizing, inviting investors to come to Germany, assuring them this is a really high-ranking, technology-oriented country.
We have more with Friedrich Merz later. Let's discuss those economic pressures facing Germany and the European Union. With us is the chief economist at Natixis Partners. Thank you for joining us. If you are Europe, you don't have the LLM models. We know the Chancellor was trying to push the idea of AI into factory supply chains, and this would give Germany a real advantage. Does it help with productivity, or does it help with real growth?
In Europe's case, the productivity gains are quite a bit less than what we were already seeing in the U.S. And I think the greatest boost to growth in Europe has come in from the increased fiscal spending and also those that have gained in defense. The productivity gains are likely to lag. The economy has been much more resilient to the shocks of the energy pressures from the Middle East.
What is the investment case for investing in Europe right now? There is fiscal spending, defense spending. Private capital is hard to come by when you look at the riots and protests in France, which freaks out investors.
The risks are quite high in Europe, particularly the near term, because growth — normal growth — is not that strong. We are seeing a big surge in global bond yields. The cost of borrowing outpaces nominal GDP growth, which puts pressure on the growth model. If you step back, this is Europe's chance really to restructure itself. It has a social welfare state that it cannot actually fund, as well as fund its defense commitments that it now has. So I would think the opportunity comes in the possibility of restructuring its welfare state and redesigning the regulatory apparatus.
The opportunities for trade in Europe are quite significant, and often it's easier for a country in Europe to export to the U.S. than within its own borders. These are the things we've talked about perennially in the case of Europe, and the opportunities are right now, and it's really a question of summoning the willingness. The concerns are quite high because if you look at France, the political center is losing to the far right and far left, and the sort of urgency to act and enact reforms does not appear to be there.
If you have a rise in extremism in many of the big European countries, it makes reform much less likely. So what are we left with in terms of economy, and what are we left with for investors? Is Germany the hot point, or is it the whole of Europe?
I would say in the case of France, where the center lost an ability to politically maneuver, it really shows how weak the center is. In the polls today, it looks like Marine Le Pen's government will come into power sometime next year, and the question is her current fiscal plans sort of do not really address the really significant challenges for France, that state government spending as a share of GDP exceeds 55%.
Offering greater services to its citizens does not merely hold up. So I would say for France, it's obviously the weak link today, but Italy also has significant problems. And Germany has fiscal space, it has the ability to restructure its sort of commitments. I would say Germany is quite different from the rest of Europe.
Does it change policies when you see protests of this kind in France? Will we see less spending on defense and more on the welfare state and on education, for example? How does that change for investors and economists?
I would think the market ultimately forces the politicians to pay attention, and France hasn't had to live through such aggressive sort of pressures in the market. We are seeing pressures for more spending, say, from the recent protests. We are also seeing the far right say we would like to roll back the reforms on pensions, which increases spending for pensioners going forward. So I would assume, and I think our case is, the market slowly starts to continue to ratchet up pressure to force that eventual reconciliation which needs to bring about the medium-term fiscal stability. The challenge is the markets can get disorderly, so as the pressure continues to ratchet up, we also see global events have a hand in things forming.
If the private debt crisis in the Middle East continues to play out, you can get disorderly markets, and the question then is the ECB can step in for the short term with its TPI program, but that does not really solve the underlying problem that government spending as a share of GDP is far too high in the face of the constraints the governments are facing. In the face of that, bond yields are likely to start falling materially, and therefore we need that sort of gravitational pull that brings about the fiscal restructuring we need.
There are two big market events to really try and figure out what this new government in the U.K. wants. The other one is the midterms. What is the read across for the midterms for the energy price and therefore the future of Europe?
In terms of the budget, I would simply say I am hoping for, and I suspect the government has given us some expectations of, a fairly boring budget in the sense it will adhere to the fiscal rules that it set out for itself. They've shown we can balance the books, and the challenge here for us is we still do not have a credible medium-term plan which restructures the size of the state. So it does reduce some of the welfare spending, but there are some plans in the works. We have the report that's likely to come right after the budget, which perhaps puts forward some meaningful restructurings for the welfare state.
In terms of the midterms in the U.S., I think as everyone probably knows, the Democrats are likely to get one or both of the houses of Congress, and what that leaves us with is likely more volatility, more political sort of noise coming in as they try to check the president's initiatives. But I would say if you look through the noise into next year, it's likely the Democrats and the president will probably agree on one thing, which is greater spending for the government, and that is again going to put pressure on budgets across the U.S., and we likely see that as well in Europe.
I would say the biggest thing we need to take away is governments are not yet pulling back meaningfully in the face of higher bond yields, in the face of persistent supply-side inflationary pressures, and what that leaves us with is a problem that we are continuing to defer. And the challenge is it becomes more disruptive for markets the longer we wait to solve it.
In terms of an actual correction, and in what kind of timeframe?
I would say the U.S., if it can actually address its fiscal problems, it has the willingness to do so. I would expect that bond yields remain high, and depending on how things evolve in the Middle East and Russia and Ukraine, and the supply shocks we're likely to see next year, it's possible they push out. And as these push up, we start to see the weaker players, whether it's firms, CoreWeave, all of these are starting to show elements of stress, which really starts to tighten liquidity in the far edges of the market, which could then start to bring back some of the growth currently taking place in the AI space.
Thank you very much. Coming up, the U.K. Chancellor is set to reject calls to increase capital gains tax next week. Talk of higher levies on banks won't go away. We discussed the outlook with Tina Lee. That's coming up next, and this is Bloomberg.
The conversations that matter, the insights you need. I'm Francine Lacqua in Berlin. Some positive news for the U.K. Chancellor ahead of his crucial budget next week. Unemployment — on balance — fell over the summer. The finance sector remains on alert after higher taxes on banks, despite the Chancellor telling Bloomberg the sector is a jewel in the U.K.'s economic crown. Joining us is Tina Lee. Thank you so much for joining us. I want to talk about a possible levy on banks in a second, but how is the business environment for U.K. businesses right now? Has everything been on hold until we find out what's in the budget and figure out what this administration wants?
We have seen a lot of momentum from the U.K. corporate sector. When we think about our businesses really across the board since the beginning of the year, we've seen tremendous momentum. So there is a little bit of a pause between now and next week when we hear what the Chancellor will say in the budget. That hasn't really prevented the dealmaking we've seen throughout 2026, and of course the pipeline remains quite strong for the end of this year into 2027.
We've reported that the government is weighing raising the bank surcharge. Citi just redid their headquarters in London, so does that have an impact on long-term investment in London?
Of course we have to wait until next week to see what the Chancellor is going to do. It does feel as if the direction of travel is a little bit clearer, and there could be an increase in the bank surcharge. But of course it's not everything. It is important that the government maintains fiscal responsibility. That's really the fundamental underpinning in terms of long-term growth and investment. And of course when you mention Citi Tower, that's an investment they made in the London U.K. That was a one-and-a-half-billion-dollar investment which takes us through the coming decades. So when we think about how we invest in the U.K., we've been here for nearly 125 years. The anniversary is coming up. We are not going anywhere, and we have a big commitment. We have deep connections to the U.K., and of course we want to make sure the U.K. is a big success.
Have you spoken about a possible surcharge? He spoke to us at the IMF last week, saying banks are the crown jewels of the U.K. How do you marry the two if there is a surcharge?
We continue to make the argument that it's important the U.K. remains globally competitive, not just with regard to tech, but the investment environment, particularly in maintaining its position as a global financial center in terms of New York. I think it is really important we continue to make those arguments. The financial services sector in the U.K. is a strategic national asset, in the same way semiconductors are for Taiwan or the technology sector is for the U.S. It should be treated as a crown jewel of the U.K., and for companies looking to expand domestically.
You've always been close to U.K. CEOs and entrepreneurs. What do they need in this growth phase?
The most important thing is policy certainty. What has been damaging in prior years has been the speculation on the budget and around the budget, and I think the discipline that's been shown around discretion has been really important. So I think creating that investment certainty to allow both businesses and individuals to make long-term decisions around the U.K. becomes really important. We see that as well in terms of how we've invested in the U.K. In Belfast, one of our most successful regional investment locations over 20 years, and part of that success has been a result of policy certainty and consistency, not just on a local level but also from a national level. It allows regions to attract multinationals but also to become regional engines in their own right.
Is there anything else the U.K. government could do to promote growth competitively right now?
I think there are a lot of things. There's a lot of areas in which the government in the U.K. has the right to win — in technology, in some of the AI skills we have here. So there's a lot of emerging innovation that we are seeing out of universities. We have world-class institutions with incredible talent. So it really is around nurturing them. It's not just in terms of startups, but also the scale of capital in the U.K. The U.K. government, through the National Wealth Fund, for example, I think has been making some real progress in terms of supporting those businesses that are looking to grow in the U.K. and really drive innovation, particularly those industries of the future. The world is changing so rapidly, and the U.K. needs to maintain its competitiveness in these emerging technologies and industries.
We are still trying to get to know the government of Andy Burnham, but do you think they really have businesses and entrepreneurship at the heart of their agenda?
I would say they have a pretty big agenda at this point. There's been a real effort to reach out to the business community, particularly over the last three or four weeks, and that is absolutely to be welcomed. In terms of the business environment, it is clear they have a number of stakeholders that they have to listen to, and of course the business community is an important stakeholder in those discussions. It really is the private sector that will drive growth. What has been encouraging is we've seen some resilience in the private sector. The earnings season has been strong, corporate balance sheets are good, which means the opportunity to invest in the U.K. and beyond continues to be there. Having the right operating environment with good policy certainty is something noted in the business community.
We've seen the 10-year gilts really quite elevated. What do you think the Chancellor needs to do in the budget to soften that?
It does feel as if there will be the Chancellor's fiscal headroom. Market expectations are that if we end up with headroom between 13 and 15 billion pounds, that will be seen as market neutral. I think all eyes will be on the remit announcement coming out straight after the budget, and the Debt Management Office has done a good job in terms of listening to investor demand and reducing issuance in the long end, in terms of the longs and the ultra-longs, and beginning to focus on that medium term, the seven to 15-year duration. That will, I think, be a key factor. But otherwise it really is around underpinning that fiscal responsibility to make sure companies and individuals can make long-term investment decisions.
There has been a dearth of IPOs in recent years. Do you see that changing, or is the move just taking companies private?
When one takes a look at the U.K. investment banking activity this year, it's been all about M&A. So to your point, Francine, we've seen a lot of public-to-private. We advised Apollo on their acquisition of easyJet, and that will continue. We've also seen a number of very large-cap transactions taking place in the U.K. But the U.K. IPO market — we were delighted to be able to be there with the largest IPO in over five years, with Airtel Money Africa's 770 million dollars. What was encouraging about that is the right name coming at the right time. We saw substantial demand not only from U.K. equity investors but also from global equity investors in that name.
As always, thank you so much for coming on. Always a pleasure to speak to you. That was Tina Lee talking about the budget and what the U.K. needs right now. Looking ahead to next week, The Open Trade has you covered. We will be bringing special programming of the Chancellor's announcements at 12:00 p.m. London time on October 28, and on the day of the budget, the team digging into what that means in front of a live audience. It is going to be fun, you better not miss it. Coming up, we speak to the Match Group executive about the changing face of online dating. This is Bloomberg.
Good morning, and welcome to The Pulse. These are your top stories. The German Chancellor says the entire political order of Europe is at risk from Russia, as he warns against complacency in an exclusive interview with Bloomberg. The French Prime Minister says new curfews will come as needed after tougher security measures follow a weekend of violent unrest. The U.K. Chancellor greets a bated breath ahead of his crucial budget next week, while Bloomberg learned higher capital gains taxes have been ruled out, while more bank levies remain a possibility. European leaders have been seeking ways to de-escalate tensions between the U.S. and Ukraine. President Trump has demanded that Kyiv stop striking Russia's oil refineries, while Ukraine's Volodymyr Zelenskyy has accused Trump of trying to pressure Ukraine into surrendering to the Kremlin.
In our exclusive interview, I asked the German Chancellor about Trump's position on Ukraine and relations with the U.S.
I'm trying to convince Donald Trump each time I meet him that this should be in his own interest — a stable Europe as a partner in the world. It is something worthwhile for the Americans as well, so they are not alone. We are willing to cooperate within NATO, but the U.S. has to take its own decisions on that. But my conviction is very clear. We are trying to stabilize the transatlantic relationship, and we are making NATO in total stronger with a stronger European power, and that is what we have already achieved.
Do you call President Trump, and how does he reply?
We regularly call, we regularly are meeting each other. The next G20 meeting in Miami at the end of this year. We very often have the opportunity to speak, and I am trying to convince them that this is in his own interest.
I'm not so sure. We are seeing mixed pictures and messages from the U.S. There are some who are still very engaged in terms of negotiating, talking to Kyiv, talking with Ukraine, talking with Russia. There are others having a different view. For some it is a business case, but I'm trying to convince the American government in total that this is something we have to resolve.
Why do you think the U.S. administration is doing this now?
Because the U.S. under this presidency has fundamentally changed its global approach. And 'Making America Great Again' says nothing more than we are working on our own, and all the others have to do the same. So the European answer is yes, we understood, we are working on our behalf, and we are working in our own interest.
