Binh Nguyen's Blog: Europe's Road Towards Regrowth Continued

Sunday, March 17, 2013

Europe's Road Towards Regrowth Continued

Almost everybody currently agrees that the European Union needs growth and reform but the key questions of late have been:
- where is the growth going to come from?
- how are we going to do it?
- how much are we willing to bet/risk?
http://articles.economictimes.indiatimes.com/2013-03-05/news/37469888_1_sales-of-tablet-computers-angela-merkel-bitkom

As I've stated before while I believe that ultimately governments should not interfere overly with the operations of businesses they should attempt to support it (within limits). To this end I think the stronger nations need to stop thinking of the weaker members in the union as just being debt burdens. They need to think about them as being possible business/trade partners as well.

I think the key thing is that they are seen to be genuinely helping rather than just enforcing a set of rules without any real discernable difference. The more developed countries can invest in the smaller countries. Since they are better able to adapt, there should be a very quick turnaround in these countries with regards to growth. In fact, if there is enough of a turnaround they may actually end up as being consumers of products/services from the more developed countries.

http://www.4-traders.com/news/Euro-Zone-Wage-Growth-Slumps-Delaying-Consumer-Recovery--16542022/

If there are any labour/skills shortages that can be fulfilled by people in weaker states surely freeing labour laws/movements must be considered. Portion of money from taxes gained from these workers who are willing to move can be sent back to the weaker countries for re-investment. This may be of particular interest for those countries that are having issues regarding ageing populations. By allowing greater/required skilled migration they fill in that gap while removing some of the 'burden' (unemployed workers) of some of the weaker countries as well.

The EU is already in the midst of approving a budget. However, I believe that there should also be a separate 'European Investment Fund'. The size of this fund will be based on a percentage to be determined by EU members but it will have one fundamental purpose. Namely, investing in projects that have the strongest likelihood of success within EU which will ultimately lead to growth. Prefer that it will be directly via EU rather than filtering down via various layers to speed up the process and to hopefully see the benefits of growth sooner. It should focus in on companies/projects that are:
- clearly competitive, sustainable, and basically only need a means of getting over this crisis
- need seed funding but show strong promise and have a concrete service/product in place (the fund will almost act as a venture capital firm)
- are things that nation states definitely need and will see short/medium impact on growth. Basic things that nations need like infrastructure (which will result in increased employment and productivity), critical research and development (which may result in drastic increases in productivity), etc...
http://www.reuters.com/article/2013/03/14/eu-summit-idUSL6N0C68TS20130314

The thing that should always be thinking about is maximum 'bang for buck'. For the smallest possible investment or change (for reasons of time required to implement the change) we need to be able to extract the maximum benefit (perhaps consider investing in SME firms only?). This can help us reduce problems related to stagnant growth in the short/medium term. If the policies in question are controversial then set a time limit on them so that we can renew or simply let the policy expire.

Help companies reform and start making things that people build/want. A common issue locally and in the EU is attempting to compete in areas where there is little chance of us succeding or else simply trying to sell things that people don't need. Locally, this means subsidising production of uncompetive goods whose sales are on the wane while in the EU this means attempting to compete with the Chinese on price even though there is little of chance of this ever being realistic without significant subsidies or moving jobs off-shore. One local program here basically has highly experienced, former (retired but now working as consultants) industry leaders basically taking time off to see where firms can change to become more competitive. Cost of such a program would be negligible if implemeted correctly and could reap large dividends.
http://www.thestar.com/news/world/2013/03/10/francoise_hollande_must_fix_frances_broken_economy_or_the_european_union_will_pay_the_price.html

Figure out how each country can contribute to the well being and future of other member states within the EU. If we do go down the route of further intergration would like further details on strengths/weaknesses of each country (one country can focus on agriculture, another on technology, and so on) and how they fit within the future EU. By doing so, we can reduce the amount of overlap and essentially give each nation a genuine purpose and a chance to thrive within the EU (use the EU like it was originally intended as an economic/trade community). If a state can not do this, then should we question their role within the EU?
http://www.guardian.co.uk/business/2013/mar/11/france-triple-dip-recession-motor-sales-slump
http://www.smh.com.au/business/europes-debt-shaded-by-cost-of-managing-it-20130315-2g67y.html
http://www.reuters.com/article/2013/03/15/us-eurozone-economy-idUSBRE92E0BH20130315

We can continue to muddle along but another alternative is going even harder/deeper/faster with regards to austerity/integration and hope that the markets realise that there is a mis-pricing and will begin to reinvest in EU countries. Obviously, there are significant problems with going down this route. Protests across the EU, and results of polling should indicate that 'the people' do not believe in such policy and there may be no mandate. If there are not signs of a pickup soon and of re-investment/growth in the EU I suspect election results may continue to be hung or else wildly skewed which further impedes the process of reform. Ultimately, the work that is being done needs to have a justification behind it. Preferably, sooner rather than later.

http://uk.reuters.com/article/2013/03/16/uk-ecb-weidmann-idUKBRE92F04920130316
http://articles.washingtonpost.com/2013-03-13/business/37681177_1_euro-zone-austerity-works-european-nations

Clearly, there has been some thought towards a multi-tier/speed Europe by several states.
http://dtbnguyen.blogspot.com/2013/03/europes-road-towards-regrowth.html
http://dtbnguyen.blogspot.com/2013/01/the-rebirth-and-regrowth-of-european.html
One thing that should be considered is whether or not we can aide this situation by essentially resorting to a 'swap' to reduce the impact of instability on Eurozone members. Basically, there are those who desire to enter the Eurozone/EU and others who are considering leaving. I suggest we speed up the process to 'fix' the inbalances that currently exist (another option to correcting the problem via austerity). We do this by swapping weaker nations for those who are better suited to the Euro as it currently stands or vice versa (stronger countries out) and de-value which ever currency is relevant we can move from there on.

I think we need to be more creative in the way we're dealing with the bond buying problem. We can use some of the facilities that have already been provided more creatively. Recently, Ireland sold more than the amount of bonds than was necessary. Think about this further. If we use some of a percentage of some of 'stability funds' to sell an abnormally large number of bonds when prices are favourable on behalf of some of the weaker states then we can basically gain some ground over the market and gain some further independence. Clearly, this will require further input/support from other member states.
http://www.irishtimes.com/business/economy/ireland/ecb-banker-hails-irish-5bn-bond-sale-1.1326553

Noticed some countries drag their heals with regards to some regulatory reform. This can often give them a temporary advantage with regards to competitiveness, but it also allows them to see what the impact of the regulatory reform is in other jurisdictions. Think about this when looking at regulatory reform within the EU. Timing is just as important as reform. If unsure, we can create inbalances by implementing across some states and not others to see what the impact is or else simply study other countries and the way they change after reform.

Despite the unpopularity of some of what has been done it was necessary to bring us back from the brink and provide us with some stability to institute reform. I think a lot of people have underestimated the size of the problem while others have overestimated them though. As others have alluded to confidence returning (especially to equity markets) but other question is whether or not they are running ahead of schedule. Think it's a natural part of a media and interconnected world. They're guessing/factoring the likely impact of the reforms that have occured before they've even been completely implemented. It's nice to have confidence back in the markets but I think we need to think further about some of the messages that are being sent out.