9th May 2012 by Darius McDermott
9th May 2012 marks two years since 27 member states of the EU agreed the European Financial Stability Facility (EFSF) in order to provide financial assistance to eurozone states in economic difficulty and basically restore financial stability across the continent.
But has the EFSF and subsequent other measures done anything to help? Henderson fund manager Bill Stormont and Threadneedle’s Francis Ellison both agree that Europe’s leaders have struggled to find a common political narrative with which to address the eurozone crisis. Elections this weekend, and the subsequent changes to leadership in both France and Greece aren’t going to make a consensus any easier to find, and the new leaders could cause all sorts of problems if they carry out their election promises.
Where politicians have come up short, the European Central Bank has had to demonstrate a willingness to be more proactive but the real challenges facing Europe remain high unemployment, a divergence in competitiveness, social unrest, government debt and a lack of growth. Quite a list. And austerity alone is increasingly understood to be an insufficient cure so the problems persist.
Slowing growth in other areas of the world (namely Asia) isn’t helping either. As Fidelity’s Trevor Greetham put it: “Every time the world economy slows the euro crisis intensifies as the peripheral countries have no means to counter economic weakness – they can’t print money, they can’t devalue and the ratings agencies pressure them into cutting government spending whenever their bond yields rise.”
The risk of a double-dip recession on the continent seems to be inevitable and political risk has intensified along with the possibility of Greece having to leave the Euro. The consensus amongst economists seems to be that there needs to be closer political union in Europe but this seems even less likely today than it did last week. The mood of the markets may darken further in the coming weeks until post-election worries settle and we have a clearer picture as to what is come of Greece and the common currency.
Despite all this negative news, investors who have stayed with the sector since the European bailout began have, in the main, not seen their investment fall to any great extent – some have even seen positive double-digit returns, particularly if invested in European Smaller Companies, which just goes to show that markets are not reliant on the state of an economy. Fortunately, European companies are actually in much better health than their governments.
But Europe has been the pariah of the investment world for around a decade now: Europe ex-UK equities were not only the worst selling sector in 2011 but also in 2009, 2008, 2005, 2004 and 2003. And, with so many problems to solve and really no end in sight, I don’t see investors suddenly warming to the region any time soon.
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