The numbers came in last week: France is in recession again, for the third time in five years. A triple-dip recession. Sacre bleu!
There is some debate as to whether this is a double-dip or a triple-dip recession; that mini-recession in 2012 was questionable. But there is no escaping the broader point here. France has a serious growth problem, and so does most of the rest of Europe.
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As a block, the Eurozone’s economy has been shrinking for six consecutive quarters, and the unemployment rate has crept up to 12.1%. Ever the country to outdo its neighbors, Italy has seen its economy shrink for seven quarters in a row. Even the German economy—the engine that is supposed to be driving the rest of the continent—is showing weakness, growing at a pitiful 0.1%.
Years of policy paralysis and a broken banking system have taken their toll. The European economy has official ground to a halt.
The upside? Well, to start French President Francois Hollande has promised an “offensive” to bring “more growth and less austerity.”
Wow, that’s brilliant. Why didn’t anyone think of that before? Clearly, all Europe needs to get out of its on-again / off-again, five-year recession was for the President of France to go on an offensive. (Please feel free to insert the joke of your choice about French military prowess in the last two world wars, Vietnam and Algeria here.)
Ok, now the real upside. Mr. Hollande’s impotent pronouncements about “offensives” aside, serious pressure is mounting on France to reform its labor markets and relax some of the bureaucracy that makes doing business in France so miserably difficult. Being a man of the left, Hollande has a better chance of actually ramming the reforms through in the sense that only an American foreign policy right-winger like Richard Nixon could normalize relations with Red China. The French state is so resistant to change, that if it is going to happen it has to led by “one of their own.”
Is Hollande up to the task? We’ll see. But he is at least starting to say the right things, such as indicating that French workers would have to work longer in order to qualify for their pensions. Let’s hope he’s serious. The world economy needs a strong Europe, and Europe needs a strong France.
The broader issue of Europe’s banking system being broken also has some promising developments. In the “bad news is good news” world of central bank policy, the European Central Bank promised to keep its loose monetary policy in place for “quite a long time.”
As John Maynard Keynes pointed out decades ago, stimulative monetary policy in the absence of real aggregate demand is akin to “pushing on a string.” That is basically where we are today. Credit is being made available, but it’s not making its way into the real economy or having much of an effect.
Part of this is due to lack of demand, but certainly not all. Small and medium-sized companies in Spain and Italy—the companies most needed to hire new employees and get the economy moving again—are being starved of capital because the funds that the ECB are making available are not flowing through the local banking systems and into their treasuries.
Desperate times call for desperate measures, and that is exactly what ECB President Mario Draghi has promised to deliver. Draghi has publically suggested lowering the deposit rate than the ECB pays on bank deposits to below zero, meaning that the ECB would effectively be taxing Europe’s banks for not lending.
Will it spur the banks to lend to one another…and to the corporate borrowers that need the funds the most? We shall see. But the ECB’s willingness to go to extreme means to shock the system out of stasis is a major positive.
And finally, we come to Germany. Germany’s low growth rate is disturbing, but all of the news on that front isn’t bad. The low overall growth was affected by low levels of investments and masked a strong performance by German consumers, who have been criticized throughout the crisis for being too frugal.
The situation in Europe looks bad, but I continue to believe that things are moving in the right direction there, even if it is slowly and in fits and starts. And in the meantime, I continue to be bullish on European equities. European equities tend to have better exposure to emerging markets than their American counterparts and particularly to the emerging markets I find most promising, such as Africa.
European equities are also attractively priced at the moment. The iShares MSCI France ETF ($EWQ) trades for just 12 times earnings and is dominated by some real gems, including fashion powerhouse LVMH Moet Hennessey Louis Vuitton ($LVMUY), food products company Danone ($DANOY) and international oil major Total ($TOT), among others.
If you believe, as I do, that Europe will muddle through this crisis intact, then keeping an allocation to European shares makes sense at current prices. I expect most major European indices to outperform their first-world rivals in North American and Japan over the next five years.
Sizemore Capital is long EWQ and LVMUY.