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Don’t wait for German elections, invest in Europe now

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Expectations of new euro area growth initiatives after the German elections in September are unrealistic. There is no money, and there is no political will for such measures.

It would be unwise to count on anything beyond the following Brussels consensus about the euro zone's economic governance: (a) the ECB will act as a "whatever-it-takes" guarantor of the common currency, (b) the ECB will support the integrity of the financial system and maintain appropriately easy credit conditions and (c) member states with budget deficits in excess of 3 percent of gross domestic product (GDP) have a conditional and closely supervised extra time to balance the books in order to avoid stifling an already weak economic activity.

(Read more: Is Germany in 'cloud cuckoo land' over Greek debt?)

The call for structural reforms to improve competitiveness applies more or less to all euro area countries. These structural reforms are expected to deliver (a) more flexible labor markets (easier hiring and firing), (b) trimmed welfare systems and (c) less onerous public services. Prodded by Germany, euro area leaders now seem to agree that the region has become a doomed high cost producer – unless it quickly and resolutely cuts costs and increases productivity.

These three policy levers – easy credit conditions, cost cutting and a more competitive production of goods and services – remain the key determinants of euro area's short- and medium-term growth prospect, regardless of the outcome of the next German elections.

That should be the "take home message" for euro area investors. And if this strikes you as a German policy prescription – it is. No shortcuts and no alternative medicine here. But like most things in life, taken with discipline, moderation and some luck, the prescription might work.

Things are still looking up – for investors

Beware the early bravado, though.

Spain is far from being out of the woods, despite an apparently stellar tourist season. Hotels and beaches are full, but inn-keepers and restaurateurs are complaining that sales volumes are low because their visitors from the north of Europe are not spending much.

Greece is also having a tourist boom and more hotels and restaurants are now giving tax invoices. But the country still needs bailout funds to stay afloat – and nobody can tell how long that will last.

(Read more: Seeking European signs of sturdier global rebound)

Fighting record-low approval ratings, the French president and his finance minister are proclaiming that "the recession is over" and that "the crisis is behind us." The unemployment is pushing up, but they are exulting – apparently with a straight face -- about a minute improvement of industrial production in the first quarter, and about their own forecast that the economy this year will grow between -0.1 percent and 0.1 percent. Yes, but please don't laugh.

Italy, gripped by Berlusconi (the former prime minister) tax and amorous thrillers, is now flummoxed by a $1.5 billion increase in his fortune since the beginning of the year, as the ECB's easy money fueled the soaring share prices of his insurance and broadcasting companies. But a "trickle down" effect seems to be there, too: Italy's second quarter GDP growth shows that the economy may have definitely bottomed out.

Investors should realize that the euro area recovery will be a long and hard slog. The German policy prescription, amended by some relaxation of fiscal policies, does not allow for a quick-fix turnaround the hard-pressed politicians want to present. To see that, one only has to take a look at budget balances projected for this year.

(Read more: Turning point or false hope: what next for Europe?)

No improvement is expected in Germany, France, Italy and Portugal, which account for 70 percent of the euro area GDP. A huge decline forecast for Spain's budget deficit to 6.9 percent of GDP, from 10.6 percent of GDP in 2012, is not credible. Over the last three years, Spain was the only large euro area deficit country where the budget gap continued to widen.

All that means that this year the euro area will again report the budget deficit in excess of 3 percent of GDP. And its public debt will continue to grow toward 110 percent of GDP, with an especially sharp acceleration in Spain, Italy and France (in that order of magnitude).

The only market where stocks and bonds look good

The saving grace is that primary budget balances (budget before interest payments on public debt) in all major euro area deficit countries have already moved into surplus positions. If these surpluses were to be maintained, and if they continued to grow, they would stop and reverse the progression of public debt as a share of GDP.

By comparison, recession-induced external adjustments in the euro area have been much faster and much bigger. In the first five months of this year, the monetary union recorded a current account surplus of about $240 billion – clearly on course for a surplus well above $300 billion for this year as a whole. That would be a 30 percent increase from a $230 billion surplus in 2012. Germany accounts for most of this surplus, but, except for France, growing trade surpluses are also reported by all other major euro area economies.

(Read more: Buy Europe; sell emerging markets: JPMorgan)

Not much saving grace here, though. So far, improvements in the euro area external trade are mainly owed to collapsing imports, ranging, in 2012, from annual declines of 14 percent in Greece to 1 percent in France, while exports last year edged up only between 2 and 3 percent.

But the composition of the euro area foreign trade should look better this year and next. The strengthening U.S. economy and the growing economies in East Asia will create expanding export markets. At the same time, structural reforms (cost cutting and productivity gains) have already improved the area's competitive position. The region's growth of unit labor costs has been brought down to 1 percent, and the coming cyclical productivity increases (as output rises and labor input continues to lag) will most probably further reduce these costs and widen profit margins.

This makes the euro area a very attractive investment destination.

(Read more: Signs that Europe is getting better)

Easy monetary policy, incipient economic recovery, falling production costs and increasing profits will support rising equity prices. With the Dow and Nikkei up about 18 percent (in dollar terms) since the beginning of the year, the euro area equity market ( 8 percent over the same period) will be catching up in the months ahead.

Similarly, the euro area bonds have long ceased to be just for the brave hearts. Fire-sale prices are certainly gone, but bond yields in Italy (4.3 percent), Spain (4.5 percent) and Portugal (6.6 percent) still offer good investment opportunities. Anyone tempted by the "Greeks bearing gifts" at 10 percent?

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

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