United States of Europe

It has been over a week since our last entry, giving time for the dust to settle from the news of the UK moving further from the core of Europe, and for the markets to give their reaction to the proposed deal to end the Sovereign Debt Crisis. The reaction started positively with prices going up across the major indices. More importantly the volume of trading also showed signs of recovery as investors took heart from all the positives that came from the treaty and inter-government agreements. Then the cracks started to appear..... Germany and Angela Merkel are adamant that Europe is set on a course towards a fiscal union. Creating a United States of Europe. This would be great news for Germany, their tax payers and industry. The rest of Europe operating under a German tax model would be a recipe for stability and economic growth. But, and it is a big but, has the rest of Europe the stomach for this and is that what they signed up to? Despite the rhetoric coming from the German parliament, it appears the United States of Europe is not what was agreed. The treaty is vague, lacks direction and leaves many policies open to interpretation at a national level, certainly not United! The time scales, as discussed last week, are all wrong for the markets to deal with. They want profit, they want it now. The promises of gradual reforms and austerity measures that will take years to have a biting effect are falling on deaf ears, as investors and institutions fear the continued fall from grace of Europe. This was seen in the recent drop in European Equities, and Italy issuing yet another Bond at record levels of interest.

This new European model, unfortunately for Germany and France, still contains the toxic, profligate members that harm European credentials. European leaders need to learn from how South America and Asia came out of similar positions in the 80s and 90s. Purge the toxicity and let the free market decide where the levels for Sovereign Debt lie and where companies are truly valued. Then deal with the fiscal policies once this base level has been established, moving forward from there. This would be an extreme and painful process for developed nations to endure, although many would argue that this cleansing would ultimately be less painful and damaging than the death by 1000 cuts Europe is currently going through. Where does this leave Europe, and more importantly, for us, investors? Europe currently lags behind the US and to some extent the UK due to their recapitalization of banks two years ago. At that time Europe had the chance to move ahead and to cement its place as a world leader in terms of being the best option for investment; this chance was missed due to a combination of factors already covered in previous blogs. Those resident in the Core Nations can, most probably, look forward to little change. However those from the PIIGS should be more concerned as a move back to national currencies is a distinct possibility. The Euro is likely to endure, joint European Debt issues (the European Super Bond), backed by the ECB, seem a certainty and further austerity measures are guaranteed. Investors can take heart further afield. The US has falling levels of unemployment and has produced some strong returns recently. Companies based in Emerging markets look good value and funds operating in these areas offer good possibilities although with likely high levels of volatility. Non-correlated investments offer the best solutions at present, either by way of investment into things disparate to equities, or via structured

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