Back in 1962, most European bankers were mad for monetary union. They were planning for it and seeing it, as Statist magazine said at the time, as “part of the writing on the wall”. The National Bank of Belgium wasn’t so sure. In a report the same year, it laid bare the potential problems. For as long as governments “retain control of their fiscal budgetary and even social policies”, it said, it just won’t work. It would be “an illusion” to attempt to unify monetary systems before the creation of a complete Community political union.
It was a shame no one was listening. Because 45 years on, an illusion is exactly what it has turned out to be.
When I first suggested a year or so ago that the crisis might end with Germany leaving the euro, it seemed slightly nutty. Today the eurozone debt debacle has escalated to the extent that the most conservative of investors are muttering about the same thing. Even Jeremy Tigue of the Foreign & Colonial Investment Trust was at it this week, telling the press: “The euro itself is at risk of falling apart”.
Still, while I am, of course, worried about the solvency of Europe’s peripheral nations, I’m not prepared to forecast the end of the euro quite yet. For starters, while it might look like it would be a mighty relief for Germany to get rid of the likes of Spain and Portugal, it wouldn’t really do them much good.
Why? Partly because, like the rest of us, the last thing Germany needs is a new banking crisis and the end of the euro would probably give them one. But also because Germany is just emerging from a long period of what Barry Norris of Argonaut calls “relative austerity”, in which it has funded reunification with the east and pushed through the welfare and labour reforms that have made it newly competitive. Disengaging from the weaker euro countries would push up the value of its own currency and “immediately render Germany less competitive”.
Cue rising unemployment and irritable voters. At some point, if the Germans want to hang on to the euro for a while – which they surely do – they will have to take the action that will allow it to survive. That means allowing significantly more quantitative easing (the buying of sovereign bonds with printed money) or simply throwing money directly at the region’s worst weaklings. Either way, the euro will end up weak but alive (until the next crisis at least).
So what do investors in Europe do in reaction to all this? They change the way they look at the region. Until very recently, if you’d asked the manager of a European fund to name his favourite country he’d have sniffed at you rather patronisingly and explained that the financial industry no longer looked at it like that. Instead, they looked at sectors across the board. They didn’t decide they liked Spain and then look for the best companies listed in Spain. They decided they liked, say, infrastructure and then looked for the best infrastructure company in Europe. However, now that it is clear that there is nothing homogenous about the economies of Europe (except in a bad way) I wonder if they would sniff so loudly. It seems that given the country-specific risks now on the table, country-specific stock selection might, once again, be the way to go.
After all, would you take an Irish company over a French one when Ireland’s low corporate tax rate is something of an irritant to all those who have just had to bail it out? Would you take an Italian one over a German one when Italian unit labour costs are 25% higher? Come to that, would you take any European company over a German one given that the German economy is actually working? Germany isn’t seeing the same jobless recovery as the rest of us. Instead its unemployment rate has fallen to 6.7% – about where it was before the reunification saga began. And, most interestingly, the new jobs aren’t coming from the booming export sectors, but from construction and services – so they reflect domestic demand too.
At the same time, Germany’s IFO Business Climate Index (an important economic activity index) has just reached its highest level in 20 years. At the start of this year, economists were forecasting just 1.5% growth for Germany. Now they are bickering about whether it will come in at 4% or more. The point? Germany has growth and, thanks to the euro crisis, it is also likely to have low interest rates for some time to come. That is something markets tend to like. Add to this the fact that, as Norris puts it, “the Teutonic boom is as yet undiscovered” and it would seem that the German market might be joining gold around the top of the very short list of places it makes sense to invest at the moment.
• This article was first published in the Financial Times