Bullish on Europe (in the medium term that is…)

Living in Sub-Saharan Africa makes me a bit of a contrarian I guess.  Nowadays, when I land at Lisbon international airport it feels like I just arrived in Switzerland. The streets are clean, the traffic is organized, the restaurants and hotels have wonderful food and design.

Yes, the recession is there, unemployment is high, but life goes on in one of the 30 richest countries on earth. That could be said about mostly any other European crisis-hit country. Unfortunately one cannot say the same regarding the many emerging and frontier markets, where extremely poor education, healthcare, justice systems and weak institutions have yet to improve significantly despite the promises of vast riches fuelled by massive natural resources and phenomenal population growth.

The reason why I am carefully bullish on Europe does not have to do with the fact that its economy and political situation are at all-time lows and hence can only get better (it can always get worse one learns in life), but with the fact that reforms are indeed happening on the ground in many of these countries.

It certainly is sad that some governments and countries had to reach near bankruptcy to act, but acting they are indeed and many profound markets reforms are underway and chronic red tape is being cut across the board. Unfair and brutal for many, there is certainly a significant short-term cost, but there could be a huge medium-term prize one hopes.

The current adjustment programs rely on two pillars: reforms and austerity. People can more or less cope with reforms since they involve mostly future pain, but they digest much less well the austerity part, since it hits them straight from day one. The dilemma is choosing between the psychological urge to punish the bad behaving countries or alternatively allowing for a process of softer adjustment (letting them off easily for the moralist camp).

The first option does not appear to be working, since significantly decreased purchasing power from tax increases and lower wages has translated into weak consumption and lower fiscal revenues, resulting in general failure to reach deficit targets imposed by the troika. One can only hope that the urge to punish is replaced by self-interest of the creditors and of the well-behaved EU countries that are paying for the misbehaved ones.

I am therefore medium-term bullish on Europe because all involved will hopefully learn a lesson – some will implement long awaited reforms, others will learn to be less judgmental. Potentially all will eventually benefit from a now inevitably closer political and economic European integration – or face breakup and much worse upheaval for all.

For the BRICS and others the opportunity is to learn from Europe’s mistakes and open much faster by introducing competition in their overall mostly inefficient markets. Unfortunately, like people, countries only learn with their own mistakes, so being a bit of a contrarian, I am not so bullish on emerging markets learning this lesson.

Stephan Morais is an Africa based European senior investment banker and investor. He was named a Young Global Leader in 2010 by the World Economic Forum and holds an MBA from Harvard Business School

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