Structural hangovers and populist opposition

Aegon AM’s Bill Dinning says ‘structural hangovers’ are giving eurozone members a headache.


Markets have taken the European Central Bank raising interest rates in their stride, perhaps because expectations for rate hikes in the UK and US have been pushed further out into the future. One consequence of those moves has been to make the euro a strong currency in recent weeks

First-quarter earnings have given more evidence of the rude health of corporations around the world – profit margins are high, reported earnings are high and balance sheets strong.

Equities and credit remain attractive against government bonds and cash. Gold remains more attractive against cash than at any time in its history. Gold costs money to store and secure but cash basically yields zero (3-month US Treasury bills yield 0.025% to be precise). We have never had interest rates this low (data goes back to 1694 in the UK) so gold is as attractive as it has ever been on a relative basis.

Given this backdrop, it is justifiable for ‘risk assets’ to have performed reasonably well. That suits our core positioning. However, we remain concerned that there are too many structural hangovers from the Great Recession to make unalloyed bullishness the appropriate strategy


One of those hangovers is the unresolved matter of dealing with the debt of Greece, Portugal, Ireland and potentially others in the eurozone periphery. Portugal has now agreed a €78bn three-year financial bailout involving the EU and the IMF. Currency traders are looking through these issues and declaring that the ECB moving its refinancing rate to 1.25% is enough to make the euro the ‘bees-knees’ when it comes to global currencies.

In the short-term, we have some sympathy with the notion of looking through the periphery problems. That is exactly what policymakers in Europe want. We need to remind ourselves that there is a plan for dealing with the situation. That plan is simple.

The EU is trying to buy time to allow its banks to be in healthier shape before asking them to deal with the implications of a debt restructuring in Greece or any other periphery country. Hence, the ECB feels it can raise interest rates because it can focus on its inflation mandate and let the politicians deal with the periphery.

The context for that view is completely consistent with the longer-term thematic backdrop that must always be borne in mind when thinking about the EU and the single-currency. That is, to paraphrase Dr Friedman, the euro is always and everywhere a political phenomenon.

Political will

On the face of it, therefore, the threat to the euro comes if there is a loss of political will to support it. There is no indication that the ruling class has lost that commitment. Indeed, the setting up of the EFSF and ultimately the ESM are indications that the commitment remains wide and deep.

However, there is a lot of concern that the electorate in northern Europe in particular will do a Roberto Duran and declare “no mas”.

We completely agree that a political backlash in northern Europe is a critical risk for the euro. Political instability would undermine the single currency and, rather annoyingly for those ruling classes, the electorate get to vote now and again.

The Finnish election on April 17 was one such annoyance. It was an unusual Finnish election because it made the front pages of newspapers across the world. The rise of the populist True Finns party (which opposes EU bailouts) to a third place finish, stoked concerns that the northern European populace are indeed now revolting against the bailouts of the south.

The leader of the True Finns put it rather more colourfully:  “The Finnish cow should be milked in Finland and the milk shouldn’t be sent abroad in charity.” Timo Soini deserves to be recognised for his wisdom.

However, in the remainder of 2011 there are few opportunities for European electorates to voice their concerns. There is a Portuguese election in June but nothing significant in northern Europe. We take the growing populist opposition to the bailouts in the euro area very seriously. However we suspect that its impact in 2011 will be limited.