It is hard to develop a long-term investment strategy in Europe, when it is not obvious that Europe has a long-term future. That may sound shocking – even after the election victories of anti-EU and separatist parties in many member states. The European Parliament still remains dominated by believers in deeper and closer union.
But the deeper and closer union might have run away with itself, as the president of the European Central Bank, Mario Draghi, now knows. The euro was always a political, not an economic, construct. Although Italy did not qualify, and Greece fiddled its economic figures, both were admitted. As a political initiative, a euro without Italy was unthinkable, and one with Greece, Spain, Portugal and others looked unstoppable. As an economic initiative, the economies of the euro-zone were so diverse that a monetary union between all of the world’s countries whose names begin with M would – literally – have made more sense.
Now we see those different economies pulling apart. Euro-zone interest rates that make (some) sense in Germany are just unaffordable in Greece and Spain. Even France – highly indebted, losing its rainmakers to lower-tax countries, and growing at a snail’s pace – is starting to look shaky. Problems in a big country like that could bring the whole thing down.
Which is why Draghi is being called on to save the euro for the second time in two years. His first round, in 2012, promised looser money in return for reform. That narrowed sovereign bond spreads between Club Med and Germany, patching up the fractures. Sadly, that same easy money meant less pressure on Club Med politicians to deliver the reforms.
The result is that everyone is now infected. With the threat of a debilitating Japan-style deflation spreading across Europe, Draghi indicated that he would throw ‘whatever it takes’ to keep the façade standing. So he cut the ECB’s short-term lending rate (from 0.25%, which is amazingly low already, to 0.15%). He is under pressure to cut the value of the euro – a desperate effort to boost exports by pricing them more cheaply, rather than making the necessary reforms to produce them more cheaply. And he is making the banks pay the ECB for their deposits and excess reserves – not much, but everyone knows it will be more unless the banks do what they are told and start lending to small and medium-sized businesses.
SMEs are risky enough, but would you want to lend to euro-zone SMEs, with all these added uncertainties? Look to the London property market for your answer.
It used to be that everyone bought dollars as a hedge against failure of their own currency. Then it was gold. Now Central London property, up 17% in the last year, has become the new reserve currency. With a strong rule of law (foreign owners are not discriminated against, and you can get your money out when you need it), moderate property taxes, and the fact that, unlike gold, you can actually live in it or rent it out, London property is the place to be.
People talk about rich Russians pushing up prices – and after Ukraine, that has become noticeable. But in recent years, it was the Italians who started the buying, followed closely by those in Spain, Greece and then Cyprus who all sensibly distrusted their own banks.
Investors are also going for equities as a form of investment that maybe is not quite as bad as all the other options on the table, which is why the London Stock Exchange is doing far better than the underlying prospects suggest it should.
But the UK itself is hardly an example of economic virtue. True, it is growing four times as fast as France, employment is up, consumers are spending again, and the government’s borrowing is coming down. But is that a real boom or another fake one?
Back in the late 1990s and early 2000s, Europe and the US had a huge economic party. Interest rates were pegged low, money was in huge supply, home loans were subsidised, borrowing went skyward, and we imported shiploads of artificially cheap stuff from China. But it was all built on that shaky foundation of cheap credit and loose money.
Like a drug user, you cannot live like that forever, and now we have the hangover. Unfortunately, the UK has decided to alleviate the pain with more of the same drug – cheap credit and housing subsidies. The hope is that it will keep things going long enough for real investment to start up again.
My fear is that, with the UK’s main export market in growing turmoil, real investment looks like a real risk. Maybe sitting it all out from the luxury of a London penthouse is not such a bad idea.
Eamon Butler is the author of ‘The Economics of Success: 12 Things Politicians Don’t Want You to Know’ (Gibson Square Books, 2014) and a director at the Adam Smith Institute