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BY SHAVASB BOHDJALIAN
Its election time in Europe and one after the other, incumbent governments are falling, giving their place to populist candidates who are urging Europe to shift direction from austerity to pro-growth policies.
Italian Premier Mario Monti and Francois Hollande who is tipped to succeed Nicholas Sarkozy in France are promising to redefine the agenda and push for increased growth in sharp contrast to the German medicine of harsh austerity first to balance budgets and control debt to be followed by growth.
Monti emphasized that the current prescription—budget cuts with structural reforms aimed at easing the way for more jobs and investment—"will never deliver growth" but he has not defined how he will do this. Hollande is also not expected to embark on a spending spree and force the deficit and debt higher.
The populist politicians are most likely to attempt to increase spending via the European Union budget, but they are likely to be challenged by the EU’s paymaster Germany as well as traditional hawks like UK, Holland and Norway.
Bottom line, don’t expect significant change in policy.
What the EU should do however is dump the Japanese model it is following and instead embrace the US style of economic management, which has proved to be more correct and productive.
The EU and the eurozone in particular is faced with slow growth, high public spending and low revenue, problematic and under-capitalised banks and a property bubble overhang. Policymakers in Greece, Italy, Ireland, Spain and Portugal have taken painful measures to control state-spending and are raising taxes to balance their books, but they have not addressed the problem with the banks and why there are not lending.
The stress tests were a massive failure since they failed to force the banks to clear their books from non-performing loans, take the losses in one go and rush to raise capital and resume lending. Instead, the EU is following the Japanese model of allowing the banks a lot of time to slowly find a solution to the problematic loans and slowly raise capital. It took Japan 20 years to go through this style of restructuring and it is unlikely that Europeans can withstand years of painful measures for long.
The EU should follow the US example and go to the core of the problem, bring it out into the open, deal with it and let the economy resume its growth path. In 2008 the US financial system came to its knees, credit stopped and major Wall Street names collapsed. The US could have covered up the problem, but instead they decided to deal with it, by adopting unorthodox policies, but come 2012, we are witnessing a dramatic turnaround in the US economy, improving employment conditions and a mild recovery in the housing market, which proves that the US model is far better and more effective rather than the Japanese model that the EU is following.
The ECB has offered EUR 1 trillion in cheap money to eurozone banks for three-years but the banks have used the 1% loans to snap up government debt at yields of 5% and book a quick profit, which is used to pay off huge bonuses.
It would be wise for EU leaders to push the ECB to offer such loans only on the condition that banks offer loans to Main Street at affordable rates. When they do this and cut red tape and bureaucracy, lower taxation and simplify procedures and force the banks to come clean, perhaps then we shall have a chance of seeing growth.
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(Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
