the Eurozone haggling process

fully discounting the EU crisis?

I’m beginning to think that we’re at, or close to, the worst point for global stock markets in their discounting of the Eurozone financial crisis.  This doesn’t mean that the crisis itself is over, or even close to that.  It doesn’t mean, either, that European stocks will be good performers in absolute terms or relative to their peers listed in other countries from now on.

what this means

Instead, it means two things:

–I think global markets have already assessed and discounted most of the bad consequences that the euro crisis will have for the wold outside the EU.  After all, the crisis has been going on for almost three years, a longer time–as I pointed out yesterday–than it took the world to do the same thing for Japan in the early 1990s.  This means we are at, or close to, the point where future uncertainties can be shrugged off by other markets.  It may even be that future deterioration of the situation in the EU will also have little effect on trading outside Europe.  Certainly, that’s what happened with the Japenese stock market, which in 1992 was still first or second in capitalization in the world.  It declined into its current irrelevance.

I’m not sure this dire fate awaits the EU.  In fact, although, again, I’m not willing to bet on this outcome, I think there’s a good chance the EU will ultimately become a much closer political union.  But I think the EU and the rest of the world will soon “decouple” in stock market terms.

–It also means I think there’s a chance to make money in carefully selected UK or continental European stocks.  (Given the reports that US-based “vulture” investors are moving en masse to the EU, the reality may be somewhat better than this.)

For example, London-based Intercontinental Hotels Group, whose IHG ADR I own (I’ve mentioned several times in previous PSI posts), is up 20% in dollars (25% in £) over the past year.  That compares with a 3.6% gain for the S&P 500 over the same span, and a £ loss of around 4% for the FTSE 100.  I don’t see why outperformance for IHG shouldn’t continue.

I’m not willing to bet the farm on this hypothesis, but I do think it deserves considering.

the current situation??    …haggling about terms

If I’m right about this, how should I interpret the apparent current impasse between Germany, which wants structural reform in Italy, Spain et al. before it will consider sharing the burden of those countries’ excessive debt, and the rest of the EU, which wants debt relief before structural reform?

I think it all comes down to a process of haggling about terms.  It’s sometimes being conducted in private, sometimes in the press.  It’s the Greek bailout process writ large.  Both sides have already decided it’s in their best interest to come to an agreement that will contain both a measure of debt relief and some relinquishment of national sovereignty.  But neither side can be seen as simply rolling over and accepting the terms the other is demanding.  Both must be viewed by their electorates as having fought hard for every inch of ground won or lost.

Two other points:

–I think the EU generally, and Germany in particular, learned a lot from negotiations with Greece.  It came to understand that for a wily haggler like Greece, each apparent agreement only creates a new framework for further negotiation.  The EU also saw that the Greek parliament enacted reform legislation on cost decreases and on taxes–but then never enforced the new laws.  Maybe it’s been ok for Greece to conduct itself like this.  I think, however ,that Germany is determined that nothing similar will happen on the wider Eurozone stage.  Supra-national safeguards must be in place.

Therefore, any definitive agreement may take time–a lot of time.  Germany doesn’t care, because the stakes are so high.  Having gone through its own massive decade-long economic restructuring after the merger of East Germany and West, Germany understands what needs to be done.

–The interests of the EU and the rest of the world may not coincide.


-The EU is currently China’s largest trading partner; privately, China may think that the EU won’t be nearly so important to it ten years from now.  So it’s urging an immediate solution, at least in part because that’s what’s best for China at the moment.

-The US economy is  slowing (to a degree I didn’t foresee), partly because of recession in the EU.  Historically, administrations are reelected when the country is either healthy already or making good progress getting there.  On the other hand, administrations tend to be replaced when the economy is sagging and unemployment is high. There’s no time, nor is there any apparent inclination on either political party’s part, to start the legislative process of helping the US economy evolve.  Therefore, Washington has a strong interest in having a quick solution to the EU crisis, on the idea that this will make the domestic situation look a bit better.