The eurozone is dangerously behind in implementing its single market plans, leaving investors unimpressed
Debate is growing among institutional investors about whether the UK is riding out the global economic downturn in a splendid fashion, avoiding the worst dips and skilfully exploiting every opportunity, or is cruising for a bruising, as the skateboarders say, with rising taxes, hidden inflation, fragile growth and a quite unjustified sense of self-importance.
But the verdict on continental Europe, is, sadly, unanimous at this point. It's heading south. All the credibility amassed from a reasonably smooth introduction of a single currency, all the investor goodwill excited by the prospect of a vast new market in deregulatory mode, has been spent. The consensus is that even if the US engine of growth reaches top gear next year, the eurozone model will barely sputter into life.
The blatant insularity of some eurozone corporate leaders is increasingly embarrassing, with charges of Anglo-American conspiracies in the stock markets. The policymakers are even worse. The European Central Bank, headed by the dour Wim Duisenberg, is now so behind the curve on interest rate cuts it is actually starting to contribute to world economic imbalances.
Europe's grand strategy was that as the economic power of the US faded because its capitalist model was flawed, that of the newest power bloc would ascend, led by the triumphant currency. However, investors have demonstrated a stronger preference for the ancient Swiss franc than the newly minted euro. Despite a 50 basis point rate cut and a strong fundamental case for considerable weakness, the US dollar has resisted encroachment from the euro.
ECB policy appears backwards to many investors. The bank is hoping that a resilient euro and weak economic growth will help contain the creeping menace of inflation. In fact, a scenario of feeble growth and a soggy currency, despite high interest rates, is emerging, compounded by rising inflation as key eurozone countries fail to curb their budget deficits.
The ECB has made it clear it is not likely to cut interest rates until it sees some movement towards compliance with the EU Growth and Stability Pact, recently rubbished by the top EC official. But higher taxes and cuts in public spending (strategies to bring down deficits) will kill off the effects of any rate cut.
No wonder confidence, growth and investment in Europe are low. Having spent a decade arguing and sometimes winning the business case for a single market, governments are now shrinking from delivering one. A unified market is supposed to be functioning smoothly by the second quarter next year but the gap between rhetoric and result is actually growing.
The biggest noise, of course, comes from the greatest offender: France. Hot on harmonisation, France is only just ahead of Greece and Portugal in implementing basic EU laws. Only five EU members, the UK, Sweden, Denmark, Finland and the Netherlands, have achieved the target ahead of schedule. France has more than 200 legal actions open against it brought by other members and accounts for 30% of all legal action taken by the European Commission.
A Europe-wide market for financial services would benefit France most, adding 1.4% to GDP over the next 10 years, yet Paris keeps saying 'non'. Germany, sliding rapidly into serious economic decline, is now too busy to 're-interpret' the off-message contributions from its partner. European equity investors are asking lots of questions but getting very few answers. Unsurprisingly, they are only too glad to return their holdings to local punters.
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