Ten good reasons to invest in euros

In these times of "Brexitian" cacophony, how can one escape from yet another salvo of arguments, demonstrations and scenarios of a European dystopia that can only engender the inevitable collapse of the Union? This is the challenge I was asked to take up at the annual investor conference organized by BCA Research a few days ago in New York.

Let's summarize the indictment: the euro is not an optimal currency area, so it can only cause dysfunctions, imbalances, and ultimately, ruin for all. In fact, we can not deny the first two terms of the proposition. The years of crisis have shown us. Let's say it, the euro is an unfinished construction, and it is not without weaknesses. But as Galileo said "Eppur si muove". Not to mention that even his fiercest opponents can not ignore the majority attachment of Europeans to their currency.

We have seen more general concerns emerge, such as
climate change, which brought the "green" parties to the deputation.

In the light of these observations, I think it is worthwhile to examine the investment opportunities offered by the euro area, and the reasons why it seems particularly opportune for me to consider them.

Number 10: Democratic parliamentarism overrides populism

The elections to the European Parliament last spring showed people's interest in these issues. In a majority of countries, turnout was up. Moreover, while the European elections are an opportunity to decide on purely local issues – favored by the electoral system and national constituencies – we have seen the emergence of more general concerns such as climate issues, which have led the parties "Green" to the deputation. Eurosceptics have made progress but have not won and remain divided. The European Parliament is thus strengthened in its prerogatives as in its action.

In Italy, Matteo Salvini's attempt to provoke early elections, which he hoped to take advantage of, finally failed in favor of the formation of a coalition of government whose coherence and stability in the management of the country is expected. This resulted in a formidable rally in Italian debt, with 10-year yields now below 1%. The appointment of Paolo Gentiloni – a seasoned European, an expert on Italian budget issues – seems to me to echo the desire on both sides to support Italian economic recovery efforts.

Number 9: Greece and Portugal leave Purgatory

The general elections in Portugal have brought the left center back to the top of the country. After the years of austerity, the budget deficit was sharply reduced, the distribution for low wages and small pensions alleviated the burden of effort, while the unemployment rate fell to a minimum. Greece has brought to power a new government team, arrived with an ambitious agenda of privatization and strengthening of labor market reforms. Both countries are expected to grow near or slightly above 2% this year. Admittedly, they still carry the weight of a large public debt – and even hardly sustainable for Greece – but are nevertheless in a better position to approach their creditors.

We should see the EIB strengthen its actions by financing
more broadly climate change projects.

Number 8: Two prominent figures at the head of the Commission and the ECB

As we have already pointed out¹ the Van Leyen / Lagarde tandem reflects the willingness of the states to set up at the head of the European institutions, personalities of an indisputable political dimension, and not mere technocrats.

Their appointment was swift and had a broad consensus. Both will have to deal with the Parliament, as with the national executives. Both carry a project in harmony with European aspirations. The agenda of Ursula Van Leyen is organized around three main axes. Strengthening East / West and North / South cohesion; promotion of climate change and technology investment policies; strengthening of domestic and external competition. In this perspective, we should see the European Investment Bank (EIB) strengthen its actions by financing more socially responsible climate change and investment projects. The Commission needed to step up its action in terms of defense and external security policy and migration policy. Coordination on fiscal policies should also be strengthened.

For her part, Christine Lagarde's mission will be to take monetary policy out of the eurozone from crisis management alone. This involves relaunching and completing banking and financial union projects.

Number 7: a less buoyant but resilient economic environment

The indicators of confidence and activity have slowed down considerably. The eurozone, which is particularly open to the rest of the world, is being affected by the general slowdown, particularly in the manufacturing sector. Germany is now penalized by its dual dependence on the automobile sector and the Chinese market. In addition, weighs on the continent the mortgage of a exit without agreement of the United Kingdom, which would affect the activity hard in the coming months. Nevertheless, the domestic dynamic is still supported by the general decline in the unemployment rate, the improvement of fiscal space and monetary cohesion.

Number 6: Europe will be a leader in implementing climate change policies

CSR (Social and Environmental Responsibility) will be a major theme in the coming years. Europe will be at the forefront in implementing policies and regulations that encourage investment for this major turning point. The reduction of greenhouse gas emissions is expected to dominate. Thus Germany – which concedes having fallen behind on its own program – is preparing to revive it with the aim of reducing greenhouse gas emissions to 50% of the 1990 level by 2050. This plan starts by investing more than 50 billion euros over four years in favor of the withdrawal of fossil fuels. Already car manufacturers are getting ready and positioning themselves to compete with Tesla.

The exit from ultra-accommodative monetary policy
is more delicate than expected.

Number 5: the ECB has finished with the drop in interest rates

Like many, I welcome the record of Mario Draghi at the head of the ECB, in a context of particularly difficult crisis. However, and as we have seen in the United States, the exit of ultra-accommodative monetary policy turns out to be more delicate than expected. There are still pockets of fragility in the eurozone. Nevertheless, banks in the euro zone are seeing their profitability improve. Capital ratios have been strengthened, as shown by the results of the last stress test. The cost / return ratios still remain above other institutions, but are being reduced. The spur of the Fintech competition, or the refocusing of financial activities in the eurozone, should support the sector.

Once past the Brexit turbulence, and while the Federal Reserve should again lower its key rate, we could witness a re-identification of the curves of the euro area.

Number 4: With the end of the fall in interest rates, the end of the euro's decline

In terms of real effective exchange rates, the euro is currently slightly undervalued against the dollar, a trend that could be corrected in the coming months. It depends largely on the dollar, we know it. As a slowdown in US activity, an additional influx of public debt and a relaxation on the front of the "trade war" – Donald Trump is now eager to get an agreement – the dollar could be a little less request. In addition, the Federal Reserve has announced a major program of purchases of T-bills, to ease the money market. The risk of conflict escalation in the Middle East, however, remains a major geopolitical uncertainty.

Number 3: Europe of unicorns, a land of the future

Both industry and services are redeploying to Artificial Intelligence. Tech itself is still only a relatively small part of the European economy. However, the sector is growing two and a half times faster than the average for the region. It's time to bet on a new and decisive push of Tech in Europe thanks to:

• The 5-fold increase in investment in this sector over the past five years. This trend is expected to continue and intensify.
• A reinforced competition policy that should open up the market, while retaining its internal consistency, at a time when trade and technological tensions threaten to segment global markets.

Number 2: Europe remains an open economic zone

Many people reproach him for it, see it as the ferment of his weaknesses, if not of his decline. Others reproach him for the rigidity of his regulations and his lack of "imagination". In recent years, the EU has signed important free trade agreements with Japan, Canada and Mercosur. Europe remains the largest exporter of goods and services in the world. Trade accounts for 1/3 of its GDP.

Tourism, a non-delocalisable industry par excellence, represents
more than 4% of the EU's GDP and more than 5% of its labor force.

The euro, the opening of the single market and the Schengen agreements have reduced transaction costs within the Union. The mobility of workers, goods and services can be further improved, while the harmonization of border policies requires greater cohesion and coordination between the Member States. Europe offers a vast territory and a market large enough to allow the launching and the deployment – including beyond its space – sectors of the future.

A very high level of education, science, tourism, luxury, are some of the strengths of the Union, which remains a great agricultural power.

Number 1: Europe earth moving

To conclude and address myself to an audience of Overseas, I had to recall how easy it had become to move from Tuscany to the Côte d'Azur, from Vienna to Madrid, from Seville to Dublin, from Berlin to Lisbon. In these times of great withdrawal, Europe is a palpable reality for millions of travelers, for the thousands of students benefiting from the Erasmus program, for all those who want to study or work beyond their borders national. Tourism, a non-relocatable industry par excellence, accounts for more than 4% of the EU's GDP and more than 5% of its workforce (around 12 million jobs). The main destinations of the Union are Spain, the United Kingdom, Italy and France.

In short

Whatever the most skeptical, the European Union has done a lot for its citizens and has allowed unprecedented economic deployment. The euro meets a very broad adherence on a daily basis as on the markets. It represents nearly 15% of the world's foreign exchange reserves (over 80% for the European Union countries excluding the euro) and stands out as the guarantor of an economic zone of stability and a strong state of law. . A project of this magnitude is not without flaws, or without risks. Critics, often just and deserved, should not hide the opportunities for investors.
And then remember that the attachment of citizens of the zone to the euro to their currency forces the Eurosceptics to put aside their exit strategies.