Investors bet Trump will make Europe investable again

The continent’s elites gathered in Davos were united that everything is awful, after years of insisting that all was well. The combination of President Trump’s tariff threats, the excitement in the U.S. about deregulation and years of stagnant growth have pushed Europe’s leaders to the realization that perhaps, just perhaps, tying up the region’s businesses in red tape is a bad idea.

The trouble in Europe is to actually do anything about it. Major changes notoriously only happen when Europe is hit by a crisis, so leading figures are trying to talk up the sense of crisis. European Central Bank President Christine Lagarde, speaking to the World Economic Forum in the Swiss ski resort, even described the situation as “existential."

All this matters not just for Europe’s future, but for investors broadly. Many have grown uncomfortable about how well the U.S. markets have done compared with the rest of the world. Some think that divergence is unsustainable and that investing abroad is a way to spread one’s bets.

If Europe succeeds in changing course it ought to boost growth, and help European stocks, which, while they have surged so far this year, are up only about 50% over the past decade. That is against a tripling of U.S. stocks.

The problem lies with convincing Europeans that they are threatened enough to trade off their lifestyle for growth.

“I’m afraid that we do regulate ourselves out from competition," said Niclas Mårtensson, CEO of Stena Line, the Swedish ferry operator. “There’s more eagerness from a European perspective to compete now."

“We’re impatient with European regulation," said Kasim Kutay, CEO of Novo Holdings, which manages the roughly $150 billion assets of Denmark’s Novo Nordisk foundation. “So much innovation is happening in Europe, but the companies are migrating to the U.S. because that’s where they can get their products launched."

He added: “Things are moving at a glacial speed and it’s just not good enough."

The big hope is that Europe will move faster to implement reforms gathered together by Mario Draghi, former ECB president and Italian prime minister, in a major report last year. The big win would be a capital markets union, the stitching together of the region’s financial markets by removing overlapping country-by-country regulation.

Such efforts go back a decade, but little progress has been made. Also needed: integrated energy systems and an easier environment for artificial intelligence development.

So far, the talk hasn’t been to actually remove regulations, but to stop for now adding to them. Most specifically, European leaders in Davos talked about aborting environmental reporting requirements through three separate, conflicting sets of rules that are due to kick in soon.

“This is a test," said one government minister involved in the negotiations to delay the reporting directives. “If they can’t even do this, there’s no hope."

European Commission President Ursula von der Leyen has given Valdis Dombrovskis, former trade commissioner, the job of simplifying rules.

Trump’s deregulation drive might provide the jolt needed to bring the rest of Europe’s leaders on board. “A burning platform, a common enemy, it could help," said Ronald Wuijster, CEO of APG Asset Management, which runs €616 billion for Dutch pension funds.

While it seemed in Davos that many of the governing class get it, it is far from clear that the voters are ready to accept the trade-offs.

“I’m not sure the national politicians will be able to sell it to the electorate," said Yann Le Pallec, Paris-based president of S&P Global Ratings.

The problems are manifold. Smaller countries don’t want to lose their stock exchanges, a likely outcome of unified capital markets. Germany doesn’t want its Commerzbank bought by Italy’s UniCredit, and cross-border bank mergers remain problematic for many countries. French and Dutch farmers hate free-trade deals, such as the recent treaties signed with Mexico and with the Mercosur group of Latin American nations, both of which need to be ratified by EU states.

Still, as Philipp Hildebrand, vice chairman of BlackRock and a former head of the Swiss central bank, points out, this could be like the early 1990s, when pressure on Europe after the collapse of the Soviet Union led to expansion into Eastern Europe and the Maastricht treaty that created the EU.

“It’s not so much to know what to do, Draghi set that out. It’s the question of doing it," he said.

Compromise is the lifeblood of European politics, and Beata Javorcik, chief economist of the European Bank for Reconstruction and Development, sees some hope for a new grand bargain. “Most decision makers are realizing that it’s a now-or-never moment," she said.

Perhaps the best thing for European stocks would be not so much more growth—because big European companies make much of their revenue outside the region—but if unified capital markets jolted savers out of their complacency and encouraged them to take risk in the stock market.

It is hard to imagine that European politicians will be jolted out of their complacency and take some risk with deregulation, but if they do, it has the potential to transform the continent—and financial markets.

Write to James Mackintosh at james.mackintosh@wsj.com