Can Europe’s low growth and high unemployment go on forever?
Many hedge funds have lost small fortunes betting on the inevitability of European change
The European politicians gather in Paris for an informal meeting with French president Francois Hoillande (centre).
The hedge fund industry is characterised by many things, not least by change. One well known City of London analyst recently described different generations of hedge fund managers in terms of army officers who got their commissions in very different ways.
There is a world of difference between an officer who received his promotion on the battlefield and one who got his while commanding a desk. So it is with hedge funds: anyone who thrived during the 2000-2003 great technology meltdown and also performed well during the financial crisis has proved his worth
in battle. The problem is that European regulation of the industry - which has intensified enormously - has driven many of these rare beasts, the extremely talented, offshore.
It is often said that the best fund managers quickly leave the EU, as soon as their business grows to the point where they can turn down a lot of money that would come their way as EU residents; what is left behind, the EU domiciled bit, is OK but average rather than good.
It is tempting to see all this as a metaphor for the EU economy as a whole. Policy, in all its forms, delivers a so-so outcome. There is, in the absence of crisis, a tendency for the economy to grow but not by very much. Economists of a certain age used to bemoan something called Eurosclerosis - notwithstanding the name, this was a common description of the pre-Euro era. Low growth and persistently high unemployment were, of course, the defining characteristics of Eurosclerosis.
Take Italy, for example. That economy has now grown, on average, by less than 1 per cent a year for just over half a century. Unemployment, particularly of the young, is way too high. We could be forgiven for thinking that nothing much is likely to change in Italy - this is, after all, how it just seems to be. For EU as a whole, nothing much ever seems to change. A financial crisis that presented an existential threat to the euro; recent elections that suggested many voters want things to change: in Brussels it is business as usual.
Many hedge funds, particularly those of the mediocre variety, have lost small fortunes betting on the inevitability of European change. This is not just a feature of recent times: many a speculator got burned two decades ago betting that the French franc would be devalued and that the precursor of the Euro, the ERM, would fall apart. In Europe, politics trumps economics, every time. This is something that only battle hardened fund managers have learned.
This is not to say that those very smart traders think that Europe will never change. They just understand the inertia that is built into a system that above all else must preserve itself. Nothing about the current carve-up of Brussels jobs for the (mostly) boys would surprise an old time observer of Europe. Those same politicians take a delight in driving hedge funds out of the EU and by only rarely allowing any trader to make much money from European policy mistakes. It’s not that mistakes aren’t made it’s just more important to stick to failed policies than to consider more sensible alternatives.
If change is to come, the smart and patient investor is currently looking at France. Recent headline growth data for the euro area is being hit by a seeming slide of the French economy back into recession. Boris Johnson gleefully claims (probably inaccurately) that London is now France’s sixth largest city as French citizens flee high taxes, bureaucracy and zero opportunities for growth.
But could change be coming to Italy? 56 years of sub one per cent growth might suggest a rock-solid pattern of politics and economics.
Some hedge funds have had their interest piqued by the activities of the new prime minister, Matteo Renzi, who seems to have more than a passing interest in structural reforms. Italy, on this line of thinking, has worked out that its debt has finally come close to a point of no return. Another half century of low growth is simply not possible. Indeed, another five years of the same could well end up in a debt default. Renzi appears to believe that the only way a crisis can be averted is for Italy to start growing. Cynics say that all he is doing is getting Italy ready for the next euro area crisis, whenever and wherever it may occur. Either way, there is some strategic thinking - and action - going on here that has not been seen in a long time.
Perhaps I am clutching at straws, making the same mistake as those who see change as obviously necessary. Or can Europe simply keep going, as it is, with low growth and high unemployment for ever?