As negotiations on the European Commission’s legislative proposals for reform of the EU’s economic governance rules are entering a crucial phase, people ask me whether this means that the climate for investors in the EU will get better compared to the US. Or whether the business will go as usual, and US stocks, US indices and other assets at the capital markets in the USA will stay highly preferred to the European stocks and bonds.
After all, the USA also has a lot of economic problems including high public debts. I also addressed this question at the international conference in Prague on the reform of the fiscal policy of the European Union.
Analysts from Central Europe – in addition to myself, economists from Poland, Germany and the Czech Republic gathered at the organizing Anglo-American University in Prague – discussed whether the EU budget reform has a chance to pass and, in particular, whether it can be effective, i.e. help reduce the debt of member states.
I looked at the question from the point of view of our clients, i.e. investors and traders on the financial and capital markets. Using the example of Greece and its budget crisis, I documented how debt approaching insolvency has long-term harmed investors in Greek securities. The main stock indicator Athens General Composite Index fell from €2,683 in 2009 to €1,121 in the first half of 2023, representing a long-term depreciation of Greek companies of more than 50%.
However, my colleagues complemented me with a description of the situation on the bond market, where, thanks to the bottomless support of the European Central Bank, the Greek bond market was ultimately distorted. And that brings me to the original question of why investors around the world tend to trust American securities. The essence might not lie in the different budgetary policies of the governments in the EU and the USA or in a fundamentally different monetary policy. The difference is, I believe, mainly in the interventions of these authorities in the market. Interventions distorting market information discourage investors.
This confirms that bad news coming from the market is still a better option for investors than seemingly good news camouflaged by state intervention.
I appreciate the Anglo-American University in Prague provides its vibrant and refined platform for various discussions on controversial topics which are so essential nowadays when the world suffers from major political, environmental and economic shocks.
Olívia Lacenová Chief Analyst Wonderinterest Trading Ltd