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 | Will European Equity Markets Ever Outperform? | | 17.09.2002 | | European Economic Summit 2002 | European enlargement and the need for structural reform in Germany dominated the discussion at this debate on the future of European equity. Moderator John Rossant, Editor, Europe, Business Week, France, asked the panel when the European markets would finally grow up and reverse the flow of capital to the US. Is Europe preparing to lose yet another decade?
Staying with the immaturity analogy, Michael J. Hartnett, Director, European Equity Strategy, Merrill Lynch Europe, United Kingdom, compared the relationship between the US and EU to that of a "mother and child." Whereas the American central bank and federal government have embraced growth, the Europeans seem to be unwilling to come of age by encouraging cross-border sectoral unification and accepting a rapid increase in the working age population. Instead of yielding to the populist Right, the European business community and the political elites should convince their constituencies that immigrants help living standard rise, rather than endanger them. Guy Harington, Chairman, Emerging Markets, Schroder Salomon Smith Barney, United Kingdom, saw significant improvements on the horizon in the economies of Eastern and Central Europe. Their telecoms need to catch up and many of the markets are still underbanked. An upcoming war in Iraq would definitely put a short-term damper on the equity markets -- with the exception of the oil-driven Russian economy – but medium term, the region is very promising.
The discussion then turned to the timely issue of the EU’s Stability and Growth Pact (SGP). Surprising many participants in the session, Augusto Lopez Claros, Executive Director and Chief Economist, Lehman Brothers, United Kingdom, called for a temporary suspension of the 3% ceiling on national debt until the economy has recovered and then a reintroduction of the limit based on a concept of cyclical adjustments. According to Lopez Claros, the EU should have learned from the Great Depression that pushing for deficit limitations when growth is slow is a recipe for disaster. He also emphasized that a drop in unemployment would not automatically lead to inflation, as the European Central Bank (ECB) now claims, because the increase in part-time and temporary employment has made the labour market much more flexible.
Europe's equity expectations could now be fulfilled in the east according to the two panellists from accession countries. Milen Veltchev, Minister of Finance of Bulgaria, pointed to his country’s flexible labour market, low deficit (under 1%), almost 0% inflation rate and 4% increase in growth this year. Structural reforms are now paying dividends and the upcoming privatization of the tobacco industry and state owned banks are indeed attractive. Asked about the future of the Sophia Stock Exchange, Veltchev admitted that it would remain active in the short term, but was doomed in the long term. Most companies would be foreign owned and the remaining Bulgarian companies would most likely be traded in Frankfurt or London. The Istanbul Exchange is also an alternative. Seeing Turkey as a role model, he stated that a regional hub for the eastern Mediterranean could develop there that might very well compete with Western Europe.
The Polish exchange seems to be faced with challenges for the opposite reasons, according to Jacek Socha, Chairman, Polish Securities and Exchange Commission, Poland. The highly active local pension funds are now finding Warsaw too small and are threatening to take their business elsewhere. Socha illustrated the good practice examples that countries like Poland, Hungary and the Czech Republic now offer the other accession countries and potential candidates through the Consultative Group of Securities and Exchange Commissioners that he will soon head. Turkey is about to join that group and negotiations are ongoing with the former Yugoslavian states and Albania, demonstrating that these equity markets are up and coming.
During the discussion Veltchev rejected the proposal to temporarily drop the SGP’s debt ceiling, saying that it would create a huge free-rider problem and send the wrong signal to the accession states. Ulrich Schröder, Head, Economic and Banking Policy, European Integration, Deutsche Bank Research, Germany, reminded the numerous members of the panel critical of the SGP that the Pact was created for situations like the current one. Andreas Huebner, Chief Executive and Managing Director, Lazard Asset Management, Germany, added that the present crisis could not be managed if insider trading is not punished in the same manner as the market in America. According to Hartnett, the SGP’s days are numbered. Geography will prevent Germany from following the Japanese model. Eastern enlargement will force structural reform in Central Europe and "kick start" the German economy. |
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