Strengths outweigh weaknesses

Everybody is already aware of Europe's debt woes. The headlines splatter them in front of us, almost every day. It has vexed the world financial markets, and kept investors in an unending state of alert as they wait for the next shoe to drop.

Last week, at an emergency summit on the euro crisis, leaders of the 17 euro-zone countries acted quickly and agreed to the German-French proposal — a package of new aid for Greece. This has calmed financial markets — at least, for now.

A glass is half full or, half empty depending on your perspective. Nowhere is that more true than when you look at Europe. And my column this week is not on the crisis, but on the opportunities Europe is throwing up for Indian investors. To my readers, I have a simple message: It's time to have a re-look at Europe.

Yes, it is a fact that the growth projection is largely an average for the entire EU, and is dragged down by a number of Mediterranean basket cases. Hidden within that ostensibly pedestrian average are some real investment gems. In my view, the strengths of Europe far outnumber its weaknesses. Let's take a look at them.

First and foremost, nations of Europe do not have a balance-of-payments problem with the rest of the world. In fact, countries like Germany run very substantial surpluses.

Second, top-class technology and leading market position are the key drivers of much of Europe's industrial output. From Italian wines and French cheese to sophisticated German cars and machines.

Third, the EU has been reducing a large part of its State control on non-sovereign activities — the so-called public sector — by efficient privatisation. Europe has been cutting wasteful “stimulus” spending. Indeed, European leaders are actually attempting to strap up such outlays.

Fourth, a nexus of growth for Europe lies in Eastern Europe, which represents poor countries — such as the Baltic states, Slovakia, Poland, Romania and Bulgaria — but can be expected to grow swiftly as they bring their economies up to the overall European level.

Pulsating Economies

And last, when it comes to public and private debt levels and current accounts — taken as a whole, the Eurozone is in better shape than the United States. It is the financial markets that have made the Eurozone the focus of their anxiety.

The bottomline for Indian corporates and investors: It's time to take a close look at Europe.

For instance, Europe's strongest economy currently is Germany. It is an export dynamo recovering rapidly on the basis of some of the world's most vibrant economic policies. The World Economic Forum has rated Sweden the world's second-most-competitive economy, ahead of even the United States. It is Eastern Europe that is the tempting wildcard in this equation. Although Eastern European countries need to modernise, that makeover will translate into high rates of economic growth, in much the same manner that India is experiencing. For Indian investors, Eastern Europe represents a nexus of growth for Europe.

Debt manageable

My central view on Europe remains that the sovereign debt crisis with strong growth in core Europe is difficult, but manageable.

On their own, Greece, Ireland, and Portugal combined are not really big enough to derail the European economy. In terms of Eurozone GDP combined, they make up just over 5.5 per cent — less than a fifth of the size of Germany. Furthermore, their combined outstanding debt is about 7 per cent of Eurozone GDP.

As I look ahead five years, I am convinced that across Europe, some of the weakest regions such as Portugal, Spain, Italy and Belgium have the most positive outlook. Their domestic problems are viewed as more short-term.

Distressed Assets

For Indian companies, it may help to know that Europe's best opportunities now are in peculiar situations. These can include event-driven catalysts — companies looking for near-term exits in mergers, acquisitions, refinancing and bankruptcies.

Acquisition premiums are falling and are creating new opportunities for strategic investors. Mergers and acquisitions are making a successful comeback and have become a key element of corporate growth strategies.

And, the most irresistible aspect for Indian investors to consider is the internal rates of return on European distressed opportunities which, this year averaged over 15 per cent. Definitely, an opportunity awaits cash-rich Indian companies.

Solidarity and Trust

With mutual dependence brought on the EU formation, the poignant reality — as in real life — is that the sins of a few troubled members are very often paid for by the entire family.

The member-countries with the feeble economies find it increasingly tricky to stay in the game, while their healthier equals become increasingly indignant of the economic and financial damage they are asked to bring upon themselves.

But truly, the odd ones in Europe are the “little Englanders” with their sovereign currency. They have their cake and get someone else to pay for it. Perhaps, a deep-seated legacy of their imperial past.

Nevertheless, among the Eurozone nations, there is a growing sense of solidarity and trust between the citizens. The euro is more than simply a currency used by the 17 nations. It is an expression of that solidarity, across Europe.

So, despite the tetchy and cantankerous Eurozone squabbles, I see a fresh bonhomie among EU leaders. For today, with the Eurozone crisis coming of age, falling out of love with the reality of single Europe and the euro is certainly not an option.

(The author is former Europe Director, CII. blfeedback@thehindu.co.in .)

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