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Chatfeild-Roberts: Something has to give

Following the recent spate of elections, Europe is obviously looking less stable. The European economic situation is also deteriorating markedly and the rot is creeping ever closer to the core.

Spain has been a particular focus of investor attention. The current total unemployment rate is 24.4 per cent. In April 2007, when life was still good, it was a more acceptable 7.9 per cent. The current rate is higher than that experienced in the US at any point during the Great Depression of the 1930s. To make matters worse, the pain is not being felt equally as current Spanish youth unemployment (defined as under 25) is at 52 per cent.

Historically, statistics such as these are not associated with social harmony. Indeed, they perversely highlight one of Europe’s biggest structural inefficiencies – the benefits system is obviously too generous. In Spain, roughly 17 million workers support an entire population of 47 million, which is disproportionate. For the record, German unemployment is currently 6.8 per cent.

A system that was created to bring populations closer together and foster more cooperation is currently achieving the opposite. Something has to give. Will we witness mass migration within the EU as residents are forced to seek work? Or will some European countries follow the path trodden by so many emerging markets during past sovereign and banking crises – devaluation?

European travails, however, have created an unexpected result. The UK, and especially sterling, has rapidly adopted safe-haven status. This is surprising, not least because the UK economy has recently proven to be as damp as the current “drought” we have been experiencing. Nonetheless, the UK’s rule of law and solid property rights are proving attractive to many residents of less stable environs. In a world where competitive devaluation is craved by economists and politicians alike, the strength of sterling is going to weigh on economic prospects if it persists. The UK economy is not without problems but this external perceptionis a huge positive.

The last two calendar years have seen European shenanigans dominate the summer months and this year is looking suspiciously similar. Decoupling is now a reality.
Economically, Europe is being left behind. Fortunately, this does not affect all companies. Given policy failures, one suspects it will take a crisis of monumental proportions to force the required change of mindset among increasingly entrenched politicians.

To return Europe to prosperity, significant structural realignment is necessary. For investors, this will provide exciting opportunities. The decision in the coming months and years is, as ever, when is cheap cheap enough?

John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management

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