Don’t miss out on the euro area transition
Over the last twelve months, the euro area composite equity indices have outperformed their U.S. counterparts. During the same interval, the euro strengthened against the U.S. dollar and in trade-weighted terms.
It is a reasonably safe bet that economic policies and underlying growth dynamics will continue to support euro-denominated assets in the months ahead. There are two key reasons for that.
(Read more: Euro zone's surprise growth boosts recovery hopes)
First, while correctly dismissing the idea of euro area price deflation, the European Central Bank (ECB) is pledging to maintain an easy credit stance and to use other means to unclog the channels of financial intermediation in some parts of its vast banking system.
Second, the euro area economic recovery is still in its early stages, but it is broadening and its mainly export-driven recession exit is now being relayed by modest domestic spending. Indeed, more flexible labor and product markets and less restrictive fiscal policies are beginning to underpin the economic activity.
All of that marks a decisive transition from a long period of endless bailout packages, fears of sovereign defaults, grinding recessions and dangerous social unrest. The euro area is now entering a new phase where the (partly) reformed erstwhile deadbeats are rewarded with pre-crisis credit terms, hopeless left-wingers are espousing tax-cutting supply side policies and sustainable growth patterns are emerging in countries where even wide-eyed optimists did not expect any for the foreseeable future.
Machiavelli's compatriot says: "Politics is not dirty business"
Who would have thought, for example, that a Machiavelli's fellow Florentine would create a stable government in Italy after an election circus a year ago, when a comedian got 25.5 percent of the popular vote and brought the entire country on the verge of paralysis? Well, it happened last Friday.
With Matteo Renzi, the former mayor of Florence and all of his 39 years, Italy got the youngest prime minister in the history of the Republic. And with his Finance Minister, Pier Paolo Padoan, the former chief economist at the OECD, Italy got an expert of world renown to lead the country's fiscal consolidation and a return to economic growth.
An even bigger surprise would hit you if you visited Madrid lately as I did. The contrast with the gloom and violent street demonstrations of the last few years could not have been greater. I had flashbacks to the mid-1980s, when I visited the Spain's capital with dilapidated buildings and small, crumbling cars belching up nauseating smoke. But it took only a few years to see a cleaned up city with elegant boutiques, sophisticated restaurants and shiny new German, French and Italian cars.
To be sure, Spain's 26 percent unemployment rate – three times the pre-crisis rate – remains a huge social problem, despite the fact that declining labor costs are bringing back the business that was outsourced to China. As in the past, some of these new jobs will be part of the informal economy and won't show up in the official employment numbers. The important thing, though, is that manufacturers and large retail outlets find that they now get cheaper production costs and cheaper merchandise in Spain than what they were getting in China.
The latest export numbers are showing that. Last year, Spain's sales abroad rose 5.2 percent to a record-high 234.2 billion euros. And somewhat stronger imports in December are a reliable sign that domestic demand is beginning to rev up.
Despite lingering weaknesses in the Spanish banking sector, confidence is definitely coming back. A week ago, Spain raised 4.5 billion euros in short-term bonds at historically low interest rates, and last Friday Moody's increased the country's credit rating with positive outlook, suggesting the possibility of another upgrade.
So, dress up if you are going to dine (caution: be fashionably late, don't show up before 11 pm) at some of those elegant Madrid restaurants because the smartly clad men and their bejeweled ladies will be looking at you. But that will most probably be the inquisitive glance of steady patrons asking: "Who is this guy?"
Fancy an oxymoron? Try a socialist supply-sider
That is what the Washington and Silicon Valley elite must have asked when they saw French President Hollande – a lifelong socialist – morph in front of their eyes into the business friendly tax-cutter and supply-sider during his recent state visit to the United States.
(Read more: The 'Merkel put' is a safe bet)
Of course, Hollande's metamorphosis remains to be seen and tested.
He has to deliver, though: French policies must be revised to support the economy and employment creation if Hollande, with his record-low approval ratings, is to have a shot at reelection in 2017. Encouragingly, he seems to be getting the message. He is now personally conducting seminars with the captains of some of the largest world companies about making France a more attractive investment destination.
If he keeps that up, the job of the German Chancellor Merkel will become a bit easier. As a veteran in matters of the European statecraft, she has been trying to coach him to little avail ever since Hollande's election in the spring of 2012.
At the moment, the French president can only look with envy at his neighbors across the Rhine: Germany's strong exports are pushing its current account surplus to 7 percent of gross domestic product (GDP), and the soaring housing demand is moving the thrifty Germans to step up their consumption spending.
These four countries – Germany, France, Italy and Spain – represent nearly 80 percent of the euro area economy, 12 percent of global output and are close to China's share of world GDP.
(Read more: Germany's new face at the ECB: Who's in the frame?)
That is where the investment focus should be. These economies are leading the monetary union's transition to a more synchronized business cycle under conditions of increasingly homogeneous economic systems, stable prices, declining public sector deficits and accommodative monetary policies.
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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