- Adieu, business cycle. On 29th March 2014, we penned blog on just how Europe as voted herself out of a business cycle. No amount of quantitative easing possibly can help Europe's entrepreneurs invest meaningfully, thereby creating significant numbers of jobs. This impossibility is due to Europe's politicians, who keep campaigning on the lines that "If you vote for me, you need never work again!". And that "never need work again" wears many cloaks: restrictive labour laws, onerous taxes and thus welfare payments, as well as "transfer payments" whereby the rich folks and regions pay the poorer ones...This means that our Economic Clock is basically non-functioning for Europe...it has been replaced by politicians gaming democracy, and by voters gaming welfare.
- Insidious yields. This gaming is what makes recent investor greed in southern Europe's bonds so dangerous: according to The Economist of 19th April, p. 9, such low nominal bond yields have not been seen "..since the single currency began." That was back in 1999, when the big hitters like Germany, Spain and France launched the Euro.
- Reforms: quo vadis? Hitherto, our take is that reforms are not going anywhere in most of the Euro's member states. In the same rag, but on page 60, we read that "assessing the scale and effectiveness of reforms is hard, not least since they tackle a multitude of sins. There are three main categories: enhancing competition, especially in services; promoting business activity rather than stifling it, and overhauling the labour markets." This year, the World Bank's "Doing Business" survey concludes that "...progress has been made in southern Europe but ...it has been patchy both between different countries and within them. Between mid - 2009, before the euro crisis took hold, and mid-2013, Greece's rank improved...Portugal has also gained ground...Advances by Italy and Spain have been less market, and France has actually slipped...in the rankings..." (Countries were ranked according to how light the burden of regulation is.)
- Greece. But Greece "improved" from a very low ranking. Besides, "Its current performance remains extremely disappointing within some crucial categories. It ranked 161st in the world as a place to register property easily....Another concern is its 98th-place finish for the ease of enforcing contracts, a crucial condition for firms to flourish."
- Italy. "Its overall rank is dismal enough, at 65. But Italy is even farther down the league table for the tax burden on business (138); ease of getting construction permits (112); credit access (109); and enforcing contracts (103).
- Spain ranks particularly poorly as a place to start a business, at 142.That is a worry because research has established a strong link...between the regulatory ease of starting a business and how many are actually set up.
- Employment regulations. "...other evidence suggests similarly patchy progress on labout-market reforms in southern Europe. Despite overhauls in Portugal and Span, southern Europe still suffers from bifurcated markets, in which the gap between 'insiders' on cosy, permanent contracts and 'outsiders' employed on a temporary basis is particularly pronounced."
- Investment implication. Summa summarum, Europe's policy kit consists only of one tool, the monetary one. Thanks to indebtedness, there is not fiscal tool to speak of, and most certainly not a "reform tool" with which yes, you guessed it, reforms are executed. So avoid European markets and stay with the far more robust American one. Read more
Dr. Enzio von Pfeil
A seasoned global economist. Enzio von Pfeil’s skill lies in understanding macro-economics, the business cycle and business operations. Hong Kong-based Enzio von Pfeil has an international education which culminated in studying inter alia under Prof. Friedrich von Hayek. He has a distinguished 30-year career (US, Germany, UK and Hong Kong) in macro-investment economics.
His understanding of currency, commodity, bond and equity movements as they relate to socio-political developments across the global economy, underscores the authority and integrity of his strategic asset allocation advice.
Ninety per cent of your portfolio’s performance is determined by strategic asset allocation.
This is precisely where Enzio von Pfeil’s depth of experience in investment economics will help you.
Enzio von Pfeil is a professional speaker and provides comments on Reuters, Bloomberg, ChannelNews Asia and RTHK. Author of five books, and with a 30-year global career as an investment economist in the USA, Germany, UK and Hong Kong, Enzio von Pfeil is a professional speaker and commentator on Reuters, Bloomberg and ChannelNews Asia on economic impacts on markets, industry sectors and corporations.