Despite widening economic and policy divergences within the region, ING sees attractive valuations for Eurozone equities, boosted by ECB monetary easing, and improving competitiveness and trade balances as peripheral economies reform, according to Mark Cliffe, Chief Economist at ING Group.
Commenting on the dynamics between core and periphery in Europe, Cliffe points notes the widening gap in economic growth and fiscal policy between the two. The periphery – led by Greece – has tightened its fiscal policy more than the core, though political pressures are leading to some softening in fiscal austerity.
Major central banks’ easing of monetary policy, including Eurozone interest rates recent cut to a record low, have pushed stock markets higher. However, European stocks remain relatively cheap in relation to corporate profits, as the boost from easy monetary policy is set to continue.
With regard to the future of the Economic and Monetary Union (EMU), “While politicians are committed to sustain EMU, fiscal austerity alone is not the road to survival. This will have to be built on a combination of the three 'Rs' of reform, reflation and redistribution," adds Cliffe. “This means a structural or supply-side reform to stimulate economic growth, a loosened macroeconomic reflation policy to boost demand, and resource redistribution from the core to periphery, whether through covert, contingent or explicit fiscal transfers.”
“The German elections scheduled for September are stalling progress on deeper Eurozone integration. Meanwhile, economic and political pressures in the periphery remain high, but contracts involving support from core countries in return for delivery of structural reform will give these countries incentives to improve their competitiveness and trade balances. The Netherlands, as one of the core creditor nations, will continue to benefit as the gateway to Germany and the Eurozone core,” concludes Cliffe.