‘Euro sclerosis’ overstated as companies hold their own
Investors too positive in good times and too negative in bad
It is clear that European companies are driving the globalisation process, not being overwhelmed by it , as narratives of Europe’s decline might lead one to believe
‘The illusion that we understand the past fosters overconfidence in our ability to predict the future.” So writes 2002 Nobel laureate in economics Daniel Kahneman in his remarkable book Thinking Fast and Slow .
The book is replete with fascinating insights into human cognitive failings. Among the many discussions is how investors put too much emphasis on the reasons successful companies’ shares perform well and on apparent weaknesses when stocks perform badly. Because company performance is not easily understood, and a large part of it is explained by chance, most investors have a very patchy record on picking winners.
These insights also have relevance in explaining the European economy’s past and assessing its future prospects.
The impact of the Great Recession, a fundamentally weak banking system, the design flaws of the euro and repeated mishandling of the single currency crisis have eroded faith in Europe’s future among Europeans and others. There is no shortage of analysts who predict that Europe will become little more than a backwater in the global economy.
Europe has many problems and it is certainly possible that the worst-case scenarios will come to pass. But the range of possible outcomes is wide. Just as economies’ weaknesses tend to be underplayed in good times (for example, Ireland circa 2005), strengths are overlooked when times are bad (Ireland now). That has certainly happened in Europe’s case.
Few of the continent’s strengths are more frequently overlooked than the continued success of European companies.
The Financial Times ’s annual listing of the world’s largest companies by market capitalisation was first compiled in the mid-1990s. Back then, the world’s two largest national economies, the US and Japan, accounted for well over half of the global top 500 companies.
As might be expected in a world in which economic activity has spread rapidly, leading to the rise of multinationals from emerging markets, the US and Japan now account for a much smaller share of the top 500.
One might have expected the presence of European companies to have diminished too, but the opposite has happened. Quite remarkably, not only have European companies held their own, their presence in the list has increased from 119 companies in 1996 to 129 companies in 2012.
If Europe is well-represented among the rankings of the world’s largest companies, it dominates the rankings of the world’s most globalised businesses.
The United Nations Conference on Trade and Development lists the world’s 100 largest non-financial companies by the dollar value of their foreign assets each year. Since the list was first compiled in 1993, European companies have come to dominate the top 100. In last year’s rankings, there were 65 European firms. By this measure of internationalisation, it is clear that European companies are driving the globalisation process, not being overwhelmed by it.
This corporate success story is based on solid foundations. In global rankings of many of the determinants of economic growth – such as education levels, business investment, research and development spending, and physical infrastructure – European countries dominate.
If the strengths are underplayed and/or overlooked, some of the continent’s weaknesses are overplayed. One plank of the “euro sclerosis” argument is based on the notion that Europe is throttling itself with red tape and excessive regulation. While there is much truth to that in some Mediterranean countries, it is overstated on a continent-wide basis.
The World Bank’s “ease of doing business” index examines a range of metrics affecting companies in 185 countries globally. The latest index puts 18 of the EU27 countries in the top 50 for ease of doing business – including Ireland.
A half decade of recessionary conditions and a very serious failure of the European co-operation model mean there is every reason to be downbeat about Europe’s prospects in the short and even medium terms. But as many of the underlying fundamentals that facilitate wealth creation exist, it is also possible that the European economy will turn around and that, in a decade, the current malaise will be little more than a bad memory.