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Post-Brexit Europe: A Period of Uncertainty and Opportunity


The two-year negotiation process of Brexit has officially commenced amidst Europe's year of elections, meaning the broader sense of uncertainty that has underpinned much of the region's business operations will continue for the foreseeable future. Richard Gnodde, vice chairman of Goldman Sachs and chief executive officer of Goldman Sachs International, discusses how companies - Goldman Sachs included - are adapting to the political landscape.

This podcast was recorded on April 24, 2017.

The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.

Copyright 2017 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges Goldman Sachs, where we discuss developments, curly, shaving markets, industries in the global economy, object, seaward, global, have corporate communications here of Goldman Sachs breaks. It poses a host of charges for Europe, of course, but the content is also facing sluggish economic growth, rising nationalists and populist parties in questions about the future of the single currency market. My guest today, Richard Nata, is vice chairmen of Goldman Sachs and heads up our european operations, and thus he is tasked with dealing with all of these issues. Put much more wretched here to discuss what it means to do business today in Europe and around the World welcome Richard. Aren't you saw odyssey a lot going on today in Europe, how a view approach your responsibilities as head of Goldman Sachs
region, given the seemingly constant flow of news and events there, but the most important areas beyond the ball and keep your eye on the long term. We ve all seen throughout our careers it. As you look There was what seemed insurmountable issues just in front of you and, of course, you work through those in a system when suddenly there in the regular. So it really is and of keeping our and the long term and press the long term is reddish rayford our role and what we do around the world, but what we do in Europe is to finance the economy, finance companies, facilitate growth, create employment, and when you look at Europe today, it's an economy in size at rivals? The? U S, it's a varies, having an economy, its source of financing. Work has been more bank led lending, less capital markets Few put broad numbers around order that its seventy five percent from the capital markets for the: U S: economy: twenty five percent from bank land,
and Europe is really the other way round and as Banks in Europe have come under pressure. The reliance and capital markets is growing all the time and so the long term opportunity for us to do what we do is very, very significant, and so the most important thing is to position ourselves in terms of infrastructure capabilities people, Ferguson client base of that we are very ready, finance and economy that size and that importance and one that, in terms of its needs, is really coming the weather, capital markets and being a major capital markets player that should work for the firm last month the UK trigger Article fifty, which I was to mark the beginning of this two year process to withdraw from the Eu Goldman Sachs Research has explained that negotiations. This type mean a great deal of uncertainty for business, is an there, be many issues on the table that will allow trade off me made up the agenda one of the key issues that you are keeping on top of for our clients, but figures. Commissioner, our bricks had really goes beyond the EU.
you're. The UK was never a hundred percent part of Europe. They were part of a single currency. There were obviously part of the single market, and that's very, very important in that broad, certain responsibilities but they always sat slightly at the edge of the broader, You, twenty aids, community went alone and sitting there, but that's where they were. They went really at the heart and the way that Germany or France when he says that the call as the real question that comes out of breaks it, here is the UK, the only country that's Gunnar, seek to leave and changes relationship. Who are they gonna, be others follow, and if the UK is the only one here, I think we get through this they'll be ocean. That's gonna go over the next number of years, and the relationship will be adjusted and loves. Dial back, but it won't be a total separation. There will be a trade agreement, its exact scope and form is obviously still to be determined and, as are many other issues still to be determined, but the real european
Question is: does the core ready hold together? That's the most important judgment to make Kelly the markets change there, from time to time. On that and yet a significant political events, I'm sure we'll come to talk about France later but as each of these elections run across Europe and the european populations have the chance to state their caisson shows what they think about Europe, us more information. So when you talking to clients, Howard using different sectors, reacted breaks it and its implications is there One model that seems dominant navigating this issues or different Clyde's, looking at very different kinds of solutions every industry is different and I think tides within those industries are different depends whether your businesses predominant You carry burst whether you reliant on the UK consumer for your business or, if it's a much broader business
Are you an export from the UK? Are you an importer you? How much do you rely on costs of production? The currencies oversee depreciated since the original Breaks advert, who knows what the trade agreement in terms of tariffs and costs of getting your products into Europe a year as of now of course, breaks. It hasn't happened yet without a referendum, negotiation hasn't happened, but you're out of costs of production is going down this, given the currency impacts broadly. for peace as everyone export. You may be slightly better position if you an importer because of those imports has gone up. Obviously this inflationary pressure in that the UK consumer, not feelings, are robust, surfing the retail space. It's more challenging, say you really have. Into the micro position. Very we step back from all of that request, How are you going to access the big market? And here the UK has a population in Vienna sixty seventy one.
People range how you gonna axis the rest of Europe and your weight as your manufacturing base have to be party to position yourself. So you get better access to the marketplace and those of the question The people are thinking through so as head of Goldman Sachs in Europe. How you thinking about the implications for our firm? What is Goldman Sachs after due to position itself? Will the two things out? It's easy for people to read too much into what we are saying our base case is going to wait and see, and we going to see what these negotiations a trailer up and seeing once we know for certain what the rednecks going to look like. Then we'll make a long term plans and will position our people capital resources appropriately, so that we can service a card price in an optimal way. So that's a long term picture, but of course we don't know how long we ll have to make that adjustment we're.
Pushing the authorities both within the UK but across Europe, hard to ensure that there is a transitional period. Prime Minister made article in implementation period with me It means the same thing it once is in agreement. How much time would you have before you have to be Ready for business under the year end as two years plus and is a two years plus a day over the two years plus a year or two. Because of that uncertainty. We have to put in place contingency plans because we have to be ready in the case that its two years, plus a day as opposed to a longer period of time, and so what we spoken about is what those contingency plans would involve and you're through two thousand and seventeen that's a lot of work in terms of scoping out what a potential for print would be at risk. get into two thousand and eighteen oversee will have to make some moves in terms of infrastructure and people and resources for them.
You think about this. This is like buying an insurance policy. You hope you're, not gonna, have to use it. But if you do you, please you gotta in place, and so that's about contingency planning in the next couple of years. So what would a more broadly distribute? Goldman Sachs Footprint in Europe look like in terms of our day to day work with clients, or should it be from the clients point of view. Seamless are, to us to make a seamless, we ve gotta, heavily concentrated model right now, with resources oversee concentrated in the UK and some minimal distribution across the continent. Yes, we go forward if our clients need to be interacting with the client base from inside of Europe. We will relocate client for In people, some of our time facing people across a broad range of european markets are real, have more people in Madrid, more MILAN, more in Paris? He and the list goes on-
and I will be a real advantage to that in the sense that people will be closer to their tyrants and from a client perspective that should be incremental and positive, and so I think, that's oversee important, what's important for the kind basin of course is important for us now and frankly, the regulators and policymakers is that our cost of production does not grow up in a meaningful way because of the costs of production goes up the ultimately, a lot of that cost. We'll get past onto the typewriter and what I mean by that is that we continue to be able to allocate our capital and manage our capital and liquidity in an optimal way and as soon as you start to fragment, pools of liquidity or ferment capital basis, it becomes less efficient. The costs can go up and that in this is a big part of our costs of production to keeping that together in a consolidated way, with all the appropriate regulatory oversight, supervision and, of course, in abreks it world. You need that oversight and supervision. Birth
the Bank of England, the pr I but also from the European Central Bank and for them, in a coordinated, joined up fashion, to be overlooking the common pool which could be used for the business right across Europe. If we can get to that state, I shall think we could get to terrific place from the clients perspective and in terms of us being able to really fulfil our role and perform our function in a really optimal way. If we get to a place where we have to fragment, and we have to have one pool of capital sitting in the UK and another pool of capital city, Twenty seven had all the consequences of that that's oversee, less attractive and more expensive. Let's move a little beyond breaks it itself. You open a lotta ceos bunch of different industry sectors, What are you hearing terms their confidence in the economy today and their willingness to commit capital in vast. Are they
me up the mystic about the growth that they're saying in Europe by staff. From the global perspective, I think the big global companies people operating in different parts of the world and its mere most of our time price. They do feel. I promise you, I think, that optimism in the U S, started growing twelve twenty four months ago in Europe over recent years alike, but certainly people are feeling much more optimistic about Europe, and you start to see it coming through. The european data are absolutely people are feeling more optimistic. And are prepared to invest if you look at emanate volumes. If you just look at the first four months of this year, there are ten twelve percent on the same period. Last year, you're, just five trillion dollars in terms of activity and a lot of that activity. Mobile gets global gas, global numbers, but a lot of that activity, is inside of Europe fair amount of it is near the? U S coming into Europe
people see on a relative value basis, Europe providing a great opportunity. now european markets, partly due to the lag and being over behind the Europe in terms of the recovery, some of the political risk that is there you're so those valuations more attractive. But the fact is this european market, or so a very big important economic block. Terrific potential inside of itself, but also to our companies, grow technology and great things to buy, and I think the price is relatively attractive. Recently you hosted a conference in London on disruptive technologies in you had some of Europe's most successful high growth tech entrepreneurs there. What's the sentiment amongst the entrepreneurial sat near and really terms at a conference, their views on growth, their ability to disrupt industries and get share. We talk a lot about in the United States here on this part gas, but we have a necessary talk. So much about the disruptive technology landscape in Europe would be interesting to hear your views after that meeting
I think it will surprise to the outside our she. I think, one of the great things about entrepreneur. Is inherently their optimistic, positive people and they absolutely not focused on the broad macro concerns and risks in their Ferguson their businesses and building significant platforms. The event you talk about we had something like seven hundred and fifty take investors. At the event, we had eighty or so tech companies, some very small, but some further down the path in terms of their development and I'd, say the taxi across it is really quite impressive. Right now is a lot more going on in the USA, or anything you sitting here in the Euro zone is broadly based. The UK has a strong body of activity industry based acrostic, try a lot in London, which is mainly frantic type activity, but the strong signs universities around Cambridge University. A lot of great technology you so year, which was recently bought by myself Bank for
thirty billion dollars. That's a great UK take success story which came out of the Cambridge area. Aircraft, Germany, you gotTA, Berlin, there's a very vibrant, seeing their companies the Lambert, lot of retail returned together. Amsterdam, some great payment companies coming out of Stockholm Spotify there's a great state and I think you're. The role models now for the young european entrepreneurs exist, and you start to get a virtuous circle. There be some great successes on the venture. Capital sides with the financing starts to come through is a lot to defer to the you mention arms acquisition, something we ve seen a lot of japanese and chinese firms get active because at home
looking it really poor demographics and low growth so there in the search for a global deals. What's it like getting those kinds of deals approved in Europe and in the UK in traditionally has been quite positive about outside investment, but as the chinese and japanese firms get more active in Europe is earnest her a backlash nerving it's a case by case basis, you think about a transaction searches came China. Acquisition of potential acquisition of some generous are fully done yet, but a transaction of great scale there's been a lot of infrastructure. Investment has come out of China into the car. I think people look at it from a case by case basis and be out of it chinese japanese investor would be viewed any differently from a Euro invested. For example, I think it's about the quality of accompanies the quality of the targets. An extra dimension visa be China which is acquiring IP
Knowledge and know how I ve been able to take some of that back into China, which gives us a double bottom line. Effect is a financial reward for the investment, but is also brain that technology and know how which it can obviously be used, but nothing it's a case by case basis and the role of admiration quality accompanies on its an attractive place to buy and using not. this investment is obviously, as the UK pulls out, and it's always had its own authorities and in their national authorities across Europe, and is that going to make it harder to get these large cross border transactions done because you're gonna have to do with: U S, regulators, UK regulators, regulators in Brussels, will that landscape make it more challenging for clients economics more compelling in the regulatory stuff can be now, I think, on the market. It must make it more difficult, but I think is very much on the margin breast. would always subtle. I know it I wouldn't say defer, but they certainly take note of what the home regulated was saying said: the youth
regulated felt very strongly negative about something. From a UK perspective, Brussels would certainly recognise that, and it would weigh very heavily in their thinking out, of course, that's true with all of the member countries, so you ve always had to weigh the set of local versus the pan European. When you think about the Brussels response novelty in the Do you have to responses run over the UK? One will be restless, I think I'd. Imagine it becomes more difficult, but the UK has been up until this point, a very open economy and has welcomed foreign investment, I suspect you're in the world that we're going into in the political to the ebbs and flows like many countries around the world is going to become on the more difficult and certainly to raise a mayor spoken about her industrial policy and preserving the industrial base in Britain's great companies in terms of public interest, best beyond measure may be more relevant in the future. But of course you up
and I would receive around these situations is a lot of political, no, and they won, but by the end of the transactions, the question of what the shareholders and saw you gonna have to do, is going to have to be some real substance to the public interest argument when apply across all set I'm sure in the UK is thinking about it signed space or its national security type manufacturing companies- that's roguish! When you talk about consumer companies, manage so, as you said at the beginning of the problem, the news keeps coming and we're speaking now, just after the first round of the french presidential election, which obviously markets were watching we'll see what do you make? The results will of its market friendly, resulted reflected what the pulse was saying, but, of course, the market really basin. What's happened. A recent election will the breaks at work and the Trump election in the? U s the distrust and poles
all of our ability to predict the outcome. Serbia, there was a lot of concern, but certainly a market friendly results. I just the observation. It is interesting that the marks already celebrating MC crowded dissipation that he'll come through in the second round. There is a second round he's gotta when it, but certainly people as they said today. We anticipate that he will, but of course he doesn't come from either of them stream political parties there. And yet I feel that a no eighty feels may do so. That is the way to go, but what France has done so in this first round is put of strong pro european player in the front seat, and that's
very significant message, and I think it's a reminder that the UK view of Europe and the citizens of the Uk Party feel about Europe. How european, I feel is very different from our french or german or dutch citizen feels, and you can run run across much of the EU, twenty seven, the frustrations and all over the EU. Twenty seven about some of the staff. It comes out of Brussels and he everybody's got their own different favorite. I should add that I feel comfortable with, but fundamentally they feel much more european and I think you ve seen that in the french elections at the end of the day for Europe to prosper, you need Germany and France together.
to be joined at the hip and driving this project for it and if macron get through the second round here becomes the president. He, alongside whoever the next german leader, will be in we going to have those elections later in the year. It will be in a position to provide that leadership to Europe and its really really important intensive, providing the political stability against which the economic growth and some of the changes and reforms that are obviously needed across Europe can take place. It's a positive for Europe, so I assume we work in a very global business. We serve global clients, but we ve got a political climate where there some serious scepticism towards the benefits of globalism. How can the firm be sensitive to those concerns both at home and abroad? It's a good creches abroad, both christian arguer of our to some of the discussion about approvals for emanated transactions, the impact on jobs,
the important and, if a transactions being done than their sole drivers, cost cutting taking jobs taking on employment, it's gonna be a tough, a transaction to get done You may be, the government won't have to intervene, but society at large reform of you. The pendulum swung this concept of fairness. and a long term, and are you doing this because it makes a better business and you going to invest in the businesses grow the business have an easier right if it's all about just cost cutting taking on employment. I think it's gonna be That's the emanate Rina plotting more broadly. This question of economic fairness, not just having strong winners and broad base of losers, we will have to be sensitive to it. From our point of view, it goes the core
what we do. We gonna have to work harder and really drive to provide finance to the growing parts of the economy, to entrepreneurs to companies so that they can grow their businesses that can create more employment that can create more opportunity and an ready making sure that we really aggressively help facilitate that sort of capital allocation. That acid allocation is gonna, be a really important thing for the future. Richard thank for joining so great to have you
to be half. That concludes this episode of exchanges. Goldman Sachs, I'm Jake Seaward. We hope you join us again. Next, this spot gassed was recorded on April twenty. Fourth, two thousand: seventy. The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty ass. the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs,
Transcript generated on 2021-10-14.