We have a love/hate relationship with our continental partners; we love Europe when it comes to holidaying, buying property abroad, wine, food, cars, washing machines and fashion, but when it comes to the serious stuff like managing economies and companies there is, I feel, a strong view that we’re better than they are.
So even before the euro crisis Europe was often a peripheral weighting in portfolios.
The European crisis has in many ways reinforced this view. We all knew, with hindsight of course, that the euro was a flawed project destined to fail; that certain countries were not good at managing their accounts and had borrowed too much; that the public sector in many European countries was far too large and therefore a burden that had to be reduced.
Few however predicted the current mess.
There is a big difference in the way European leaders have handled the crisis compared with the popular view in the UK as to how it should be handled. “Print money” is the cry I hear again and again – in other words do what the markets want. You can’t win against the markets is the view. But what European leaders have done is face down the markets (for now) and with good reason.
The markets shouldn’t be all-powerful. The elected leaders of democratic countries should be able to manage their economies in the best way possible and that may mean taking action that markets don’t like and taking the time to find the right solution.
Only weeks ago bond markets were panicking, sending the benchmark bond yield in Italy over 7%, making their financial situation worse, which in turn created further panic. But this type of situation is damaging not just for Italy but for a huge range of investors.
What the bond market needed was calm, reflection and a return of common sense. And it seems this is where the political leaders in Europe succeeded.
Clearly this isn’t the end of the story. A solution to the euro crisis that is cast iron is needed, one that has no wriggle room in it and which ensures the measures taken and to be taken to bring down debt are stuck to. Pressure will no doubt build again and the markets will focus once more on all associated issues, but as the reaction to the downgrade of France and the drop in Italian bond yields have shown the reason to panic can sometimes subside quickly when there is a breathing space.
Perhaps the UK political class can learn something from the approach of our continental political partners?
