Europe recovery to remain difficult

The results of the French election offer some hope for investors, but the road to European recovery will remain difficult.

“While austerity is part of the solution to the European problem, you’re never going to solve it with austerity alone,” says Peter Drake, vice-president, retirement and economic research, for Fidelity Investments Canada. “You need to get these economies growing.”

Francois Hollande won the French presidency by promising a government program to support growth, running parallel to austerity measures. While this may sound contradictory, Drake thinks it could work.

“If a proper balance is struck, then you could argue that perhaps the outcome could be potentially positive,” he said, joking that his language leaves more than a little wiggle room. “There’s obviously a good deal of uncertainty.”

He says North American investors should not worry too much about the Socialist party winning the presidency, as Europe’s Socialists have “enough real world experience” to avoid policies that won’t work.

“The way I think you get growth in these countries is to do what we economists call ‘structural reform’—a very sterile term,” he says. “For some of these economies you need to tear them apart, and put together the pieces that work. Ultimately that will give you the type of growth that you need.”

And if France needs to be taken down to the studs, Greece might be closer to a complete tear-down.

Not everyone is convinced that the new French president will be able to drive growth.

“Many have read the French and Greek elections as a sign that European policy is turning pro-growth,” wrote Jose Wynne, head of North America FX Strategy at Barclays Capital. “Certainly, the winning candidates have taken advantage of the increasing frustration about growth and unemployment, but it is hard to see what a fiscally driven pro-growth agenda would entail.”

He points out that Europe is not battling a typical recession that would be cured by a boost to demand. Instead, it faces “rebalancing of external and fiscal accounts that, while painful, look unavoidable.”

A pro pro-growth agenda without spending cuts probably won’t work, he says, it won’t answer the solvency questions that hang over the sovereign bond market. Spending will erode confidence because it will drive up the debts that caused the recession in the first place.

“With limited fiscal room, a pro-growth agenda will have to come from reforms, monetary policy, and/or bank recapitalization,” Wynne says. “There is always room for further reforms, and while needed, they tend to have a long-term effect on growth. However, markets demand a palpable plan now, which means the burden is likely on monetary policy and bank recapitalizations.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.