Mark Dampier: Germany will rethink its view on printing money
Saturday 12 November 2011
I realise I am probably tempting fate this week writing about Europe. With the situation changing daily, if not hourly, we could either have utter calamity or temporary respite by the time you read this. What doesn't change is the constant reminder that monetary union without proper fiscal union is bound to lead to problems; something that Eurosceptics like myself have warned against for years. The pro-euro voice in the UK has become very quiet indeed as the mistakes made by European politicians come home to roost.
Creditor nations, notably Germany, are as much to blame for the problems as the debtor nations such as Greece. Creditors have responsibilities too. It seems insane that Greece was allowed to join the euro in the first place, and even more senseless that they were lent vast sums of money at cheap rates. Yet Greece is tiny, representing around 1 per cent of eurozone GDP, and in theory easy to contain if the political will is there. The problems really start when you get to the larger nations such as Spain or Italy. There isn't enough money to bail out these nations, whichever way you look at it.
The solution European politicians keep coming back to is austerity, but progressively pushing through more cutbacks is not going to work, particularly at a time when banks are being recapitalised. True, the banks have too much bad debt on their books, so this clearly needs to happen at some point. The trouble is that money is effectively taken out of circulation in the process, draining the money supply and causing a deeper slowdown. The time to increase banks' capital provisions is when the economy is booming, not when it is struggling, and I see little chance of banks increasing their lending as politicians would like.
So the Europeans are likely to make the situation much worse if they insist on going ahead with a bank recapitalisation immediately. Unfortunately regulators around the world are desperately trying to close the stable door after the horse has bolted and disappeared over the horizon. To counteract this deflationary effect what Europe really needs to do is to follow the US and the UK into quantitative easing (QE). Printing new money would allow more of it to circulate out in the real economy.
The stumbling block here is Germany, who believes QE will lead to inflation. Those who have studied German history will understand the hyperinflation of the Weimar Republic in the 1920s still haunts German society today. Unfortunately I simply cannot see any way round the problem without resorting to money printing, and I don't necessarily see it as inflationary at a time when banks are pulling in the levers of credit. So, at some point Germany is going to come to terms with the fact this is the solution.
So we still await the tipping point, the ERM moment, when a real decision to get to grips with the problem is made – or the market forces it. When the UK was forced out of the ERM in 1992 the equity markets took the news badly, but subsequently recovered strongly. Something similar could easily happen with the European crisis.
Until then markets will remain nervous, and as Euro politicians lurch from one disaster to the next it is not surprising UK investors are withdrawing from European equities. Recent Investment Management Association figures show large redemptions. I can see their logic, and things might get worse before they get better, but given the levels valuations have reached already it could be a mistake. According to our own research European equities are now two standard deviations below what we consider to be fair value. This is not to say they will not go lower, but given a five-year view it is very tempting to phase some money into funds such as Henderson European Special Situations, Jupiter European and Cazenove European.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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