Macro: The Bull case for Europe and the Euro

If you read any news source today, there is one common theme: “The EUR and the European union are doomed”.

Every economist, politician, bank boss, asset manager, talk show host (and their grandmothers) now know exactly what Target2 accounts are and why Europe is on a one way track into doom and bust. Additionally they ussually mention that they always said so. Some of them offer additional advice for instance how helpful it would be if countries would go back to theri own currencies, or adapt the gold standard etc. etc.

I do not claim to have any superior knowledge about how this will work out, but i want to point out some of the issues why I personally think that one should not take those “market pundits” too serious:

Past experience

Example Late 80ties – October crash

Especially now I am feeling that I am getting old, but in a positive way regarding capital markets. I started investing as a student in the stock market with my own money in September 1987, so that makes it almost 25 years now. Those were interesting times as well. I remember reading English news articels in School in the late 80ties, where everyone was convinced that the Japanese will take over the world and the US will never ever make it back to past glory. As a small side show, there was always the threat that some lunatic will push the red button and blow up the entire world with nuclear weapons. There was no internet but you could read in any newspaper from the most clever guys on earth why this is inevtiable and we are all doomed.

Then, out of nowhere, the Wall fell and the “peace dividend” created one of the most amazing booms in the history of the world. I had the privilege to visit Eastern Germany in 1988 and I still remember how this looked before. I would say that we are living ain a much better world now than back then, despite all the gloomy headlines.

Example Asian crisis 1998

Just one example more: In the late 90ties, the Asian economies were down and out. In the wake of the “peace dividend” in Europe, Asia had a very good developement in the early 90ties, but then, mostly due to large FX debt loads, the finanical sector in most Asian countries crumbled with the “real economies” as well. I still remember lynch mobs in Kuala Lumpur and other really bad things happening there. Everyone wanted out of Asia because they were all failed states and failed economies.

Fast forward 13 years and Asia is the poster child of growth and budget discipline. Howver many people seem to forget that this did not came over night and required some significant changes. But again, in the late 90ties and early 2000s, no one saw that coming as well. I rememebr one project in 2005 wheere I was involved in a (on shore….) pre IPO participation at a Chinese company where most people involved simply refused to participate. Now of course everyone (and again also their grandmothers) always saw it coming and knows exactly where it is going for the next 20 or 100 years.

Lessons learned

The lessons of those episodes at least to me are clear:

1. No one really knows what is going to happen in the future, developments are never linear over a long period of time and disruptions (positive or negative) can happen more often than one imagines.

2. The “loudest” commentators are mostly people who make a living out of it (Roubini, Martin Wolf, Krugman etc.) or are talking their books (Bill Gross, El Erian, Kyle Bass etc.)

3. Crisis are always a catalyst for change. Structural changes take time and will not be recognized for a long long time

So coming back to the Bull case for EUR and Europe, how could this look like ?

I try to narrow it down to a few “structural” points:

1. People want Europe and the EUR

As the Greek elections have shown, even in Greece, people actually want to stay in the EUR and the European union. I think it is also a generational thing like the German reunification. Many young people who have enjoyed the advantages of a borderless Europe will not support the opposite. And due to demographics, the share of those people automatically increases each year. Just watch who the PDS (the “democratic” successor of the former GDR communist part is just “dying out”.

2. Changes are happening, but they take time

financial market pundits are always looking for quick fixes, the magical wand being waved and solving every problem quickly (and giving a nice quick return on one’s trading positions).

When the crisis started, the EU had nothing to counter it. Now we have the ESM, the EFSF, we have USD swaps with the FED, they have a pragmatic ECB. Of course the pundits scream “this is not big enough” or “this is not fast enough”. Basle II, one of the main drivers behind increasing Government debt is reworked.

In many countries, the Government has changed and those Governments are implementing reforms. Again, it is not a quick fix but many steps in the right direction. Maybe something like the FDIC on a European level is missing, but if I interpret this correctly, something like that might be on the way.

In my opinion, the market has given absolutely no credit for any of this.

3. There is still huge growth potential in Europe

If Europe and the Eurozone gets it right, there is still a huge “natural” growth potential in Europe, especially in Eastern Europe. As difficult as it sounds, but what is currently mentioned as the biggest advantage of China, poor people wanting to move into the cities and climbing up the ladder, applies to countries like Bulgaria, Romania, Ukraine etc. as well.

4. Companies are becoming more European and more competitive

What I can see in many of the smaller companies I am following is the fact that many of them now (by pressure of their declining home markets) are forced to expand internationally, especially in the neighbouring EUR countries. And many do so quite successfully. This means more competition on the one hand but more competition means more efficiency in the long run. So less competitive companies will suffer, whereas clever competitive companies will discover that a large more or less homogenous market offers advantages.

And those companies will fight (and lobby) for the EUR and the European Union.

5. You never know what is going to happen

Finally, a lot of other things could happen on the positive side. Maybe a break through on the clean energy side ? Space and time travel ? China buying EUR bonds instead of USD bonds ? I don’t know and the market does not know.

6. There is no place to hide

A lot of people are trying to give “clever” advice where one can “safely” invest if the EUR and the Eurozone falls. In my opinion, the economy globally is much to interlinked that there were any safe havens. Short term yes, the USD can go up, the GBP can go up. But maybe not. Long term the global powers have to work together to get out of this mess. Whenever you hear the word “decoupling” you should run to the hills.


I am sure many readers could come up with 100 reasons why Europe and the EUR will fail out of current media reports and all might be valid. Hopefully I could make the point that the consensus is usually dead wrong and that in many comparable crisis people would not recognize any positive REAL developments even if you hit them on the forehead with them many times.

I don’t suggest that we will see a massive rally in the EUR stock market soon, but in the medium term the opportunities will present themselves to the long term oriented investor if she/he is looking in the right places against the consensus view.

Based on past experience, such a full cycle from crisis and doom back to normal or even boom can last 5-10 years. Depeneding on when we start to count (2008 or 2011) we might be somewhere before or relatively close to the bottom.

People are much to focused on short term Central Bank actions. Long term, the “real economy” will prevail. And again, the future is not a fixed lineary extrapolation of the past.


  • Hallo Winter,

    vielen Dank für den (langen) Kommentar. Zustimmung zu allen Punkten, gemeinhin wird aber EUR und Europäische Aktienmärkte immer in einem Zug genannt.

    Zur Bewertung: Ich kann mich nicht mehr erinnern, wann es das letzte mal so viele interessant bewertete Firmen gab.

    Es gibt hunderte von Firmen die zwar Probleme haben aber “schweinebillig” sind, es gibt aber auch viele Unternehmen die günstig und gut sind.

    für jeden was dabei.


  • Hallo MMI,
    man sollte vielleicht unterscheiden zwischen dem Euro und den europäischen Aktienmärkten. Warum sollte der Euro schwach werden, nur weil wir Staatspleiten in Europa sehen? Im Gegenteil ist das Abschreiben von Schulden förderlich für die Stabilität, im Gegensatz zum Monetarisieren, ferner kommt es wohl mehr auf das laufende Defizit an und weniger auf das Monetarisieren der bestehenden Staatsschulden – damit wird nur Geld in das Bankensystem geschleust, das dort bleibt. Welche Bank vergrößert derzeit ihre Bilanz und vergibt massig neue Kredite? Europa als ganzes hat immer noch sowohl eine geringere Staatsverschuldung (relativ zum BIP), als auch ein geringeres Defizit als die Vereinigten Staaten. Das Finanzieren eben dieses mit der Notenpresse sollte eher den Dollar in Bedrängnis bringen – abhängig davon natürlich, daß die Dinge sich tatsächlich so entwickeln, wie z.B. auch Balkenchart das erwartet. Schließlich hat die Eurozone meines Wissens eine ausgeglichene Handelsbilanz mit dem Rest der Welt, ganz im Gegensatz wiederum zu den USA. Wenn sich irgendwann niemand mehr findet, der weiterhin das Außenhandelsdefizit der USA finanziert, was passiert dann wohl mit deren Währung? Die Abwertung des Dollars ist dann unvermeidlich, um wieder zu einer ausgeglichenen Handelsbilanz zu kommen.
    Aber ansonsten gebe ich Dir recht – man sollte eher wenig auf solche volkswirtschaftlichen Langzeitüberlegungen geben, höchstens noch auf das Gegenteil davon. Viel besser ist es, stattdessen nur auf die Bewertung zu schauen (des gesamten Aktienmarktes) und sonst zu hoffen, daß alles doch unerwartet ganz anders kommt. Wenn es schlecht läuft, ist in der niedrigen Bewertung schon alles eskomptiert, falls nicht, sind hohe Gewinne drin. Eben Antizyklik bzw. hier antizyklisches Market-Timing basierend auf Fundamentaldaten.

  • A really good article!
    I think many investors are too much concerned about the near future, but the long term is what counts for the value of a stock.
    If I am confused about a the economy or about a specific stock, I try to ask myself: what could the situation be in 10 years? I think a very general answer to that is much more useful than specific predictions of the next 2 or 3 years.

  • regarding 1:
    at least in greece young people voted for syriza (against the euro) and the older people for stability and the established parties ND and Pasok.
    In my opinion Schengen and EURO can be treatet separately (e.g. Switzerland is in Schengen Area).
    regarding 2:
    the momentum of structural reforms seem to have come to a halt. markets, which are trading the future rather than the past, are interested in flow variables like decreasing velocity of structural reforms, change in interest rates etc.

  • The most important opportunity that this ‘European crisis’ provides is the opportunity to invest in a mental model that will remain relevant throughout our lives. The European currency union is but one experiment in a repetition of experiments that will have to be conducted to meet the increasing demand for international integration.

    Investing in a mental model that provides a solid base from which to describe, probe and criticize macro-scale events is a necessity if one wants to compound wealth over an extended period of time. I agree with you that making predictions is not that important. Predictions are just bricks in the wall. The important thing is to understand where you stand and to know when you’re wrong.

  • Hi MMI,
    couldn’t agree more with you!

    It is really time to stop the whining, grab the chances for change that are arising out of this crisis and look forward.

    There is a saying in German “What doesn’t kill you makes you harder”.
    If Europe can find a way out of this crisis (and I am positive it will), then it will develop significantly through that process and produce a huge “post-crisis-dividend”. I think the important thing is to stay together even if it gets tough and to remember that beraking into parts never helped any society to prosper.

    Re. your examples above let me add the early/mid 2000s, when Germany was said to be doomed and to be inflexible, old-fashioned, expensive and generally the “ill man of Europe” who slowes everybody down.
    See what happend within only 5 years time: Germany is a much admired star throughout the world and suddently became the biggest hope of Europe’s future!
    Amazing how things can change.


  • Utterly agree with you, especially on point 6. If European society falls apart, there are not many reasonable – legal – places how to hide your wealth. Throughout WWI and WWII the most effective “hiding places” for large wealth were high-quality companys. I dare to state that this will not change much over time. No matter what currency the share is denominated in, 1% of a great Italian company will stay 1% of a great Italian company.

    Another good thing: beer will always taste good, regardless what is happening to the ECU.

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