But it’s not. The euro did climb briefly above the symbolically important marker of parity with the dollar–and still stands around 20 percent above its historic low. European markets, however, have slavishly followed Wall Street’s tumble. Shares in Frankfurt and London are around 40 percent below their 2000 peak, while French shares have halved in value from their record high. What’s going on here?
Some investor skepticism stems from the poor short-term economic outlook for Europe. Economists are lowering forecasts for euro-zone growth, following weak consumer- and business-sentiment surveys–even as the European Central Bank continues to mutter darkly about the threat of inflation. The export-driven German economy–Europe’s largest–looks especially vulnerable to any further rise in the euro, or an extended slowdown in the United States. More fundamentally, investors remain unconvinced that Europe is serious about reform.
France, Italy, the Netherlands, Denmark and Portugal have all recently elected right-of-center governments on manifestoes promising substantial tax cuts, privatization and pension- and labor-market reform. Germany looks set to follow suit in September elections: the Christian Democrat, Edmund Stoiber, is leading Chancellor Gerhard Schroder in the polls. But the advance of the right is not all it seems.
With the possible exception of the Berlusconi administration in Italy, most of the new governments are not proposing radical changes. French President Jacques Chirac and Stoiber are, at best, timid supporters of free-market reforms. At worst, they will resist many of the further European Union moves to liberalize the European economy. The broad EU agenda now includes measures to accelerate the integration of European capital markets, reduce the costs of cross-border trading, establish a single market in securities by 2005, create common European rules for takeovers and foster competition between Europe’s exchanges and investment banks.
The most contentious issue is pension reform. A shift to private pensions across the continent is crucial to the long-term health of public finances and would provide a major liquidity boost to European markets. However, unions in Germany and France are already preparing to fight any reforms that would reduce state pension levels. European governments will find it extremely difficult selling radical reform to skeptical voters at a time when stock-market turbulence is damaging private pension funds in Britain and America.
More generally, continental Europe remains lukewarm about the merits of “American” shareholder capitalism. Market upheavals and corporate-governance scandals merely confirm many prejudices about the supposed weaknesses of the U.S. economic approach. The fall of Jean-Marie Messier from French conglomerate Vivendi was widely perceived to be the result of Messier’s headlong pursuit of American-style shareholder value. Indeed, the U.S. corporate scandals might just provide some EU member states with an excuse to renege on their commitment to capital-market reform, or at least to preserve protectionist features of the existing system, dressed up as “investor protection.”
Germany is unlikely to drop its opposition to new merger rules, unless German companies can continue to use poison pills to fend off unwanted takeovers. Member states may also attempt to hold onto the catchall powers contained within existing EU directives that allow them to intervene in securities markets for the “general good.” Any moves to restrict cross-border competition in European securities markets would damage the economy in the long term–increasing the costs of trading and raising the cost of capital for business.
However, this gloomy prognosis for investor-friendly reform in Europe should not be overstated. The development of pan-European securities markets–coupled with the arrival of the euro–means that EU governments are probably less sensitive than in the past about the need to protect their domestic stock exchanges. European governments will undertake further pension reform, albeit at a slower pace than the markets would like, due to increasing fiscal and demographic pressures. Corporate restructuring will continue. European markets will not enjoy a bull run like that of the 1990s, but they are likely to offer better value than Wall Street in the next few years.
