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EFTA01188408 | EFTA01188409 Eye on the Market I February 26. 2013 J.P.Morgan Topics: Why being underweight European equities has been the gift that keeps on giving reduce the risk of sovereign and bank defaults, not just in Italy but across all of Europe. EU governments and central banks have provided 800 billion Euros so far to finance foreign investors fleeing Italy and Spain, and could provide a lot more. But it is getting harder (particularly after last year's EU equity rally) to dismiss the social and political costs Southern Europe is paying to keep the Euro. In my view, the old system was messier with its periodic bouts of inflation and devaluation, but worked better for Southern Europe given its structural competitiveness gaps with the North, and its own internal fiscal transfer dynamics2. Some believe Europe is on a long journey to further integration; I think it is just as likely that pans of Europe are on a long and painful journey to discover that a single currency has more costs than benefits in the long run. As for France, the recent spat between a US tire company CEO and French Industrial Renewal Minister Montebourg got a lot of publicity. There is hyperbole being thrown around by both sides, but we do find evidence that France has created a worker's utopia compared to many other countries. Last year, we showed a chart indicating that France has the most worker-friendly environment of 40 countries analyzed (November 7, 2012), a computation based on labor force participation, ease of hiring and firing, retirement age as % of life expectancy, working hours per year, vacation days, linkage between pay and productivity, unemployment benefits as % of wages, etc. France has been trying to enact reforms, but my sources differ sharply on their potential for success. France has lost a lot of ground to Germany since the Euro was launched, and I'm not sure Industrial Renewal ministers can change that. Here are some stats from Bernard Connolly at Hamiltonian Advisors: • • • The share of French corporate profits in gross value added is the smallest of the six major EU countries, and falling While Germany has maintained its share of world exports, France has lost one third of its share since the Euro was launched. France's current account deficit is around 6% of GDP (in other words, very large) after taking into account depressed consumption due to high and rising unemployment The growth challenge for France is something we will have to watch as well. It's not as bad as in Italy, but as shown below, other than during wartime (see Appendix on why wars are excluded from charts like this), this has been a very bad stretch for French growth. A period of no growth over 7 years in France is something seen more frequently during the 19i° century. It was also seen during the 1930's when France stuck to the gold standard longer than other countries did, and paid a price. The are some parallels between the gold standard in Europe in the 1930's and the binding constraint of today's currency union. Le retour a Vanden regime: France's zero growth pace mirrors 19th century events Change in 7-year real French GDP, percent, since 1820 50% 40% 30% 20% 10% 0% /' Radicals Franco/Prussian war and i f It Great Depression, Paris Bourse elected, reductions impact of tariff -10% worsened by delayed move crash of 1882 and factory on French industry to drop gold standard failure of Union strikes and Generale rising tariffs -20% 1826 1838 1850 1862 1874 1886 1898 1910 1922 1934 1946 1958 1970 1982 1994 2006 Sources: -Statistts on WorldPopulation, GDP andPer Capita GDP,UniversItyof Groningen: Conference Board, Bloomberg. 2 Charles Gave of Gavekal Research has written a fascinating, brief essay on the politics of Europe (entrepreneurs vs rentiers and statists). and how local currencies used to work regarding the financing of within-country entitlements and transfers. This equilibrium was maintained since private sector salaries were linked more to the Deutschemark than to domestic currencies. 2 EFTA01188409 Epstein Web iOS app on the App Store.
May 12, 2026 at 10:16 PM