Drama aside, worst may be over for Europe
Yes, the muddled Italian elections are a worry. Yes, the Cypriot bailout signals private investors aren’t going to be allowed to go scot-free. And yes, Spain remains mired in recession and France is working to avoid one. But after meeting with various economists, decision-makers and decision-shapers on the Continent in recent weeks, I feel confident saying Europe should improve going into this year’s second half and 2014.
A lot of the credit can go to the European Central Bank, whose pronouncement last summer that it was “ready to do whatever it takes” to preserve the euro and to assure euro liquidity by purchasing debt from member countries as needed was a game changer. This helped pull in sovereign spreads and stabilize financial conditions among peripheral European Union members, reinforcing tough reforms these countries have made to get their fiscal houses in order and qualify for assistance. It helps that eurozone finance ministers recently voted to give Ireland and Portugal more time to pay back bailout loans, viewed by some as an acknowledgement of their sacrifices to date.
This operational flexibility comes as various economic indicators suggest the eurozone economy is bottoming, notwithstanding the recent International Monetary Fund (IMF) projections which downgraded euro area activity from +0.25% to –0.25 % for 2013, while maintaining 1.1 % growth for 2014. The catalyst remains Germany, where unemployment is relatively low, housing is stable and rising, and export demand is strengthening. Its political environment also is improving, with polls suggesting 60% of Germans favor more decisions at the euro-area level, a “more Europe’’ appetite that could help German Chancellor Angela Merkel in September’s federal elections.
Green shoots sprout in crisis countries
Several peripheral countries that have struggled also are seeing some signs of diminished crisis risks, aided by tough-minded measures that lowered their labor and business costs and—along with a weaker euro—improved their competitiveness. For example, recent reports show Spanish construction companies winning international customers, Volkswagen adding to its Portuguese workforce and Greece exports rising 30% year-over-year.
In Ireland—held up as a model for sticking with painful budget cuts and tax increase to meet the bailout requirements of the euro troika (IMF, European Central Bank and European Commission)—exports have risen above 2007 levels when the Celtic Tiger was roaring. Recent retail sales and employment data also show Ireland’s economic condition improving—the IMF projects Ireland’s economy will be among the fastest growing this year in the euro area.
There have been and will continue to be bumps along the recovery road. France is struggling to avoid recession, and tight credit conditions and fiscal tightening are threatening Italy, the eurozone’s third-largest economy where privatization and labor-market and other structural reforms are desperately needed. The good news is the Italian politicians found an acceptable outcome by re-electing the current popular president, which suggests Italy will be governed by a new Grand Coalition. The new Grand Coalition represent continuity and will simultaneously tackle reforming the electoral system and continue to press forward with Prime Minister Mario Monti’s reform roadmap that both consolidates state finances and proposes labor market reforms.
In sum, it’s too early to say with certainty that the worst may be behind Europe. But our travels—and discussions—found reasons for hope and helped us identify many attractive investment opportunities for long-term, patient investors.