This is a stake in the ground for those who believe the eurozone crisis is an economic one; it should also be the final point for politicians to face up to the fact that Greece and the Greeks are skint so the technicalities of whether Greece is about to default or not are irrelevant as it has already defaulted in all but name.
Election fever
Economists and investors know this; it is just the politicians who dare not admit it in public as it means they have made mistakes. There are general elections this year in eurozone members France, Italy, Greece, Germany and Finland (as well as the US, China – OK, a power change – and Russia) so there will be a lot of playing to the home crowd rather than appeasing the wider European Union needs.
This highlights one of the fundamental flaws of the way the Union was set up – there is a reason why Europe is not represented at the G8 and why the EU still sits alongside Germany, France, Italy and the UK at the G20. Besides saying the entire Union should be broken up and national independence and currencies restored, sharing nothing more than trade concessions, I will leave politics well alone.
Given the continent is so close to home, Europe also gets an undue level of attention from UK commentators. Listening to Nick Greenstock, managing director at Gatehouse, earlier this week he was very convincing when he argued that globally, Europe is not a big deal – Jim O’Neill is predicting 4.5% growth this year – and if the euro collapses it will not bring everything else down with it.
He is more positive about the outlook for Europe and says we need to “get beyond the importance of looking at Europe’s decline”.
Despite all the doubt surrounding Europe, there is still one certainty – that the crisis will be resolved, so investors should think about the long term and think more positively about the opportunities that are there.
Momentum’s investment director, Glyn Owen lists why Greenstock is right to be positive:
- Despite the initial failure of Europe’s political leaders to anticipate and prevent the crisis, there is now a much greater sense of urgency and preparedness to take the necessary steps;
- The European Central Bank under Mario Draghi has shifted gears and taken a new approach. The effects of the policies implemented in December have already begun to ease the liquidity pressure which banks are facing;
- It is easy to overlook the fact that debt and structural problems can be solved, and perhaps quicker than anyone thinks possible. Ireland is perhaps the best recent example of a potentially successful recovery but there have been several other successes over the past thirty years;
- One of the biggest shorter-term concerns for investors has been the peak in funding requirements of European sovereigns and banks in the first half of 2012 and so far progress has been encouraging; banks are well on track to raise their capital reserves for the July 2012 deadline.
- Although there is a broad consensus that Europe is either in or soon heading into recession, there is little evidence of severe economic contraction outside countries most exposed to the debt. Overall, Europe as an aggregate could show a modest expansion of between 0% and 0.5% this year.
His conclusion is that sooner or later the news flow will turn and become impossible to ignore but it is important to take the opportunities when they arise.
Europe’s importance is as a huge source of equity importance and investors can afford to ignore the posturing politicians and doom-sayer economists and look at fundamentals such as low valuations and strong corporate balance sheets.
With the caveat of there still being risks involved, if commentators can stretch to promote MENA and frontier propositions, Europe should still play an active part in client portfolios.
