“If I, taking care of everyone’s interests, also take care of my own, you can’t talk about a conflict of interest.” – Silvio Berlusconi
What could an ex communist, a standup comedian, an eminent economist and a former cruise ship crooner possibly have in common? The answer is that these are the options facing the Italian electorate as they go to the ballot box this weekend. There have been plenty of nervous column inches devoted to the subject of Silvio Berlusconi’s potential return to power. Certainly the former prime minister’s campaign prowess, alongside his chokehold of the Italian media, make this a very real possibility, and his promises to undo a lot of the incumbent’s good work are unlikely to be very popular with Germany or the ECB. However, so far investors lending to the Italian government have seemed reasonably relaxed, with benchmark borrowing costs rising a little so far this year, but far from alarmingly.
The reason behind this could be that political gridlock seems more likely than the land slide populist victory that would be needed to reverse the fiscal progress made to date by Italy. As we noted last week, it is this progress that continues to allow the ECB to act as a financial backstop for Italy. A victory for Senor Berlusconi would no doubt result in some increased volatility in capital markets, but as we’ve been saying for some time, a set back is arguably overdue.
There remain plenty of other sources for that setback too, particularly in Europe where a robust economic recovery remains elusive. Meanwhile, a spat between a well known US chief executive complaining about French working practices and an outraged French industry minister, – serves to remind us of some of the difficulties implicit in achieving a union encompassing so many utterly different cultures and economies.
The anniversary of George Washington’s birthday this week is perhaps a timely reminder of a time when the United States was not the economic benchmark for the rest of the world it is today. Post the revolutionary war, North America was a loose confederation of states, some heavily indebted, some less so, with most operating at different economic trajectories. It fell then to Alexander Hamilton, the first US Treasury Secretary, to assume some of this state debt in return for some control of state spending policy. The analogy with Europe is far from perfect, but the idea that the cultural and economic obstacles that a union in Europe faces are either insurmountable or even unprecedented is just not true.
Though bumpier markets are likely, Europe remains an attractive place for investors to take some risk in our view. In spite of all the difficulties that the region still faces, the last few years have proved that the social and political systems in Europe can actually take a lot more punishment than we previously might have suspected, without dissolving. Alongside this, the ECB and many of the most important political players have demonstrated they have both the will and the means to keep the euro intact.
Pull backs should be used to add to equity positions in Europe, where we see valuations as inexpensive both relative to other asset classes and to their own history, while cash remains the only safe haven for nervous investors.
William Hobbs, Head of Equity Strategy EMEA