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On Tuesday night at the McCann-Erickson building in midtown Manhattan at an event hosted by the European-American Business Organization's American Business Forum on Europe (ABFE), Joseph P. Quinlan, Economist and Chief Global Market Strategist, Investment Strategies Group, for Bank of America, presented fresh insights from a study just released by the Center for Transatlantic Relations (http://transatlantic.sais-jhu.edu/bin/c/s/us-eu_report_final.pdf).
With the Greek debt crisis putting Europe center stage again as the focus of global investors, Mr. Quinlan's views are worth noting both for investors and anyone interested in the fate of the European Union (EU).
Here is a summary:
1. The Obama administration is obsessed with securing European troop commitments for the Afghan war surge. Instead, the U.S. should focus on helping European banks deal with their bad debt and putting the EU's fiscal house in order. There is a crisis of economic leadership on the world stage, according to Quinlan, and Obama is not moving effectively into the breech. The U.S. President could start by resuming the Doha Development Round in earnest to tackle outstanding issues between the EU and the U.S., especially regarding agricultural subsidies (which are of particular interest to all five CFR readers).
2. The EU will let the Euro slide to parity with the dollar in the next three years, which, according to Quinlan, makes this an inopportune time to buy Euros. Mr. Quinlan agreed with Crotty's assessment that the fine craftsmanship of European luxury exports has not been enough to offset the recent strength of the European common currency (when genuine experts agree with Crotty, this is regarded as a good thing).
3. European growth will be 0% this year, U.S. growth will be 3.5%, and Chinese growth will 10%. Against this backdrop, the EU knows it has to do something. And, according to Quinlan, letting the Euro drop in value is their evident answer. This is bad news for U.S. companies currently making money off the relatively strong Euro, though great news for U.S. tourists looking to vacation in Europe (see you soon Adam in Copenhagen, Frank in Berlin, and the Tichys of Abtenau!!) and possibly for American companies that plow their Euro profits back into Europe (not something the corporate-tax-hungry Obama-nauts may take to kindly).
4. European nations are loath to confront the political minefield of cradle-to-grave entitlements, lest they provoke even more rioting in the streets. Quinlan expects public opposition to worsen (a warning shot to U.S. Democrats: when you are forced to withdraw government crack in ten years time, there will be howls from the codependent masses here too!). Disgraced Greece (whose citizens today are a far cry from their stoic, industrious ancestors) is but the tip of the European iceberg, according to Quinlan. The other PIIGS (including Portugal, Ireland, Italy, and Spain) will soon come trough in hand. Which is why it is critical, even though Greece (in terms of GDP) is only 2% of the EU, that the EU stop the bleeding at Athens. And he believes France and Germany, the dominant economies in the EuroZone, will see no option but to bail out Greece, as much as it upsets local constituencies (especially in Germany, where, in a rare show of post-war Nietzschean chutzpah, 2/3rd of the public opposes a Greece bailout).
5. It is best, according to Quinlan, if the EU handles this debt crisis on its own. Otherwise, Europeans and global investors will lose faith in the EU's ability to manage itself. Alas, despite how shameful this would seem, the IMF is waiting in the wings to help Greece gets its budget under control, should the EU fail to do so.
6. Contrary to imbecilic Internet chatter, and the war of words between Greek and German government officials, Germany is NOT leaving the common currency. And neither is Greece. It's not only absurd, but also dangerously irresponsible, to make claims to the contrary, chimed in ABEF CEO and President, Sven Oehme.
7. According to Quinlan, the lollygaggers in Europe need to learn from America how to increase productivity through job cuts and improved technology. Even though such changes are politically difficult in today's European welfare states -- which are historically averse to layoffs during a downturn -- they are necessary for Europe's survival as a viable economic player.
8. America's biggest problem (as Crotty has been preaching for DECADES), is our educational system (or, rather, the unwillingness of many able, young people to get even a semblance of real world training). Even though we are still (if barely) the largest manufacturer in the world (18% of global manufacturing output), we keep losing manufacturing jobs because we have a huge number of unemployable, unskilled workers with not even a high school diploma. According to Quinlan, in 2010 American skilled workers are spending again, but not the unskilled. If we don't solve the education crisis, we will need punishing taxes on the skilled labor force to pay for the laggards with no skills and no work potential. As Mr. Quinlan and I agree, more than any other issue, the best way to insure American competitiveness going forward is a man-on-the-moon effort to radically increase American high school graduation rates and dramatically increase our pool of scientists and engineers. Short of such an effort, we may soon be licking China's boots even more than we already are (Obama's pathetic kow-towing over Tibet is just one embarrassing example among several).
9. According to Quinlan, the European political-economic crisis is a huge opportunity for the EU to create a common debt pool. Right now there is a common currency, but 16 different sources of capital and risk. This creates a golden opportunity for speculators to play one country against the other. Speculation would decrease with a common anonymous pool of capital.
10. China's staggering growth is partially dependent on tagging their currency to the dollar. If the Chinese currency was allowed to float, China's heated growth would cool (with the attendant domestic strife that might engender, I might add). This is why China is not yet a full world player, according to Quinlan, but rather a mercantilist success story. China must let its currency float for integrity and balance to return to the world financial system, and for China to make its next "great leap forward."
11. The dollar is still the refuge currency of choice, despite claims to the contrary. The Euro will be less the second choice. Ditto for the pound. Despite the popularity of commodities in general, gold will not replace the dollar. If it did, according to Quinlan, that would be a signal to "move to Mars," because the capitalist system itself would be in default.
12. As a way to play the declining Euro, Quinlan is buying French luxury good companies and German large cap stocks. It seems at least the French foresaw the sudden financial accessibility of their extraordinary products. Earlier Tuesday, at a gastronomically decadent celebration at the French Embassy on 5th Avenue, putatively in honor of a rare exhibition of the Medieval sculpture “The Mourners” at the Met, and part of a promo blitz cleverly called Dijon Must’Art, the city of Dijon -- heretofore known primarily for its mustard and as the birthplace of Gustave Eiffel (he of the signature Tower) -- pulled out all the stops to win American patronage (the Dijon Must’Art continues all day Wednesday in the Vanderbilt room at Grand Central). As your farm correspondent was feted with mushroom chocolate, Cassis-flavored marshmallows and exotic pate by Michelin chefs over bottles of exquisite Burgundy wine and Saffron Gin, I chatted with Dijon’s Senator-Mayor, Francois Rebsamen, who echoed some of the above points regarding the Transatlantic alliance, especially the need to create mutually sustainable development (more on what Dijon is doing in that regard in a future piece).
Nevertheless, on a completely biased personal note, the Dijon and Quinlan events only reinforced my preexisting feelings about the Transatlantic relationship. For, in my direct experience, I’ve found it VERY difficult as a small businessperson to do business in or with Europe. As much as Europeans claim to admire American freedom and innovation, they strike me as overwhelmingly distrustful of our forward-thinking ideas when presented to them directly as investment opportunities, even though invariably they end up adopting these very ideas only a few years later. I pitched Europeans on the mobile Internet, Internet TV, and social media back in 1999. They pooh-poohed all three. Now my Euro friends practically live on their smart phones, on YouTube, and Facebook. Such frequently hostile or indifferent reactions to original ideas, especially American ideas, is precisely the reason that Europe has a paltry, risk-averse entrepreneurial class compared with the U.S. and why I and many others who have a natural affinity for European people and culture can’t take the continent seriously as a place to do business. Often based on faulty evidence, baseless jingoism, or a provincial focus on form over substance, the initial European reaction is invariably “MAIS NON!” Europeans need to change that to “OUI!” and soon, lest they become permanent also-rans in a China-U.S.-dominated global economy that is speeding ahead without them.
RESOURCE:
If you would like to join the American Business Forum on Europe (ABFE) and hear similar analysts during this critical period in Transatlantic Relations, you can learn more here: http://www.abfe.biz/Membership.html.
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