value and opportunity

If one observes the current debate at the moment, there are is a lot of criticism for the Euro as a concept in general.

Many so called experts basically say the following:

If [Ireland/Spain/Greece/Italy/Portugal] would have their own currency, all problems could be easily solved just by a little devaluation and everyone would be happy again.

As the “poster child” for this example, many pundits than refer to the Icelandic example and how well Iceland is doing these days.

Star economist Steven Keen for example is promoting a similar approach in this Interview in Ireland, where even his Irish host seems to have a problem in understanding how this really should work.

I am not a trained economist, only a “humble” value investor, but out of my actual experience, I try to reconcile the “Euro is evil” thesis with reality. I find it interesting that there are at least 3 countries with their own currency, where thiscurrency does not solve any problems. Let’s look at them seperately:

Argentina

Argentinia is the well documented poster child of what can go wrong with its own currency. Despite a commodity led export boom, devaluation of 80% and more they still didn’t really manage to turn the ship around. Many observers attribute this to widespread mismanagament and corruption, but at least in the case of Greece one could expect the exact same outcome. However without any chance from additional exports and natural resources.

As far as I know, banks were not the problem in Argentina, but the lack of trust in leadership and rampaging inflation following the devaluation despite price controls etc.

Hungary

Also an interesting case. Hungary was on “convergence path” with the Euro. The following devaluation brought many Hungarians on the brink of bankruptcy, because everyone had financed everything in EUR or CHF anyway, so devaluation actually backfired big time.

Since then a nationalstic Government tries to achieve some sort of “Silent Nationalization” through special taxes on foreign owned companies (see Magyar Telekom, which i owned but sold due to this risk).

As most of the foreign currency loans were granted by bank subsidiaries of Italian, German and Austrian banks, the Hungarian Government did not have to stabilize banks in a significant way.

United Kingdom

The Uk did the full program: Quantitative easing (several times), deficit spending (a lot), devaluation and achieved some significant inflation. Nevertheless, the UK is already in a double dip recession .

So also in the UK, the own currency including the full instrument case doesn’t seem to be the silver bullet, at least in a time frame of 3-4 years time.

So what can a value investor learn from this ?

In my opinion there are a few take aways:

– exiting the Euro and having one’s own currency is not the silver bullet for countries like Portugal, Spain, Ireland, Italy and even Greece. It only really helps if you can export much more than you import, otherwise you just end up with high inflation

– politicians are not completely stupid. They will be aware of this.

– current discussions about a Euro break up, especially from the notorious US based perma bears should be weighed against the actual experiences in those 3 countries

– investments in the PIIGS countries are risky, but a currency break up might not be realistic, even in the case of Greece

– within any analysis, one should focus on structural changes, where the impact is only seen at a later stage

– one should never forget: Real (positive) change only happens in the time of crisis.