Last month I attended Lazard Asset Management’s annual investment dinner, where the guest speaker was Peter Mandelson. Lord Mandelson spent eight years as UK Secretary of State for Business, Innovation and Skills and European Commissioner for Trade, so I considered my questions carefully.
“How should we rebalance our economies in Europe?” I asked. “And how far are we able to pursue reforms, given the euro-zone context?”
Mandelson made much of the fact that the EU accounts for 20% of global GDP - about the same as the US. He was also optimistic about the euro: “No-one wants the single currency to fail on their watch,” he said.
Well, maybe. I’m sure the True Finns (for example) wouldn’t mind a bit. Even as we spoke the Slovakian parliament rejected enhancements to the EFSF. Still, the Slovakians came around, and indeed, the euro is likely to muddle through. The real question is whether, in saving it, Europeans might forego any chance of preserving at least some of that 20% share of global GDP.
Which brings me back to my questions. Lord Mandelson answered the first persuasively: luxury goods, high-level manufacturing, green energy, intellectual property, a focus on emerging consumers. But the second went unaddressed - which was surprising, given my preamble.
“At the global level,” I said, “it’s obvious what we need to do: spend less on credit, become more competitive, make more stuff that the emerging consumer wants. If the emerging consumer spends more, EM currencies appreciate, and our labour and exports look even more competitive. The world rebalances. The trouble is that these reforms - exemplified by Germany’s ‘Agenda 2010’ - are toxic to uncompetitive neighbours like Greece.”
Without euro-zone break-up we face fiscal transfers which will end up being a tax on improved competitiveness. Europe could find itself very badly-positioned for global rebalancing because it cannot achieve internal rebalancing.
Contrast the US. It is fashionable to point to how much worse its political stalemate, debt burden and jobs market are. But October not only saw a centrist pulling ahead in the Republican presidential race, but healthy ISM surveys, better bank loan numbers, and more than 100,000 jobs added to payrolls (including an expanding private sector and the first indications of ‘onshoring’). Expect Q3 growth to come in above that all-important 2%.
Ten-year Treasury yields that dipped below 1.70% on September 22 sat back at 2.22% 15 trading days later. German Bunds suffered a similar sell-off, and European stocks actually started to outperform over the same period. Investors clearly feel that Europe has become too cheap relative to the US - and are piling back in as the politicians appear to edge towards a euro-zone solution. I wonder if they are right - or if the short-term cure might prove to be a long-term disease.