19 May 2010

Are European lawmakers panicking?

Since Monday, we have had a series of announcements and water-testing:
  • Last night, Germany's financial regulator decided to ban naked short-selling of certain euro-zone debt offerings, certain credit default swaps and 10 financial stocks (some discussion this morning about a European wide ban on shorting bank stocks)
  • May 18th EU finance ministers passed the draft text of a new Alternative Investment Fund Managers Directive to the European Parliament(text to be finalized in July)
  • There are insisting talks of a tax levy on all financial transactions 
  • Legislators want to increase custodians’ liability for the assets they look after
All this looks uncoordinated and adds a sense of panicky decisions. From memory, the ban on short-selling for financial stocks during the 2008 meltdown, did not stop bank stocks falling but for a very short period of time. And the market may wonder whether the German authorities know something we don't. In short, European authorities by their actions for the past couple of months are just adding volatility, fear, suspicion, incertitude and overall lack of confidence.
Anyway, it will lead to over-regulation and costs without changing anything to the roots of the problem; it seems that many politicians in Europe are becoming convinced that there is a coordinated plot to kill the euro: pitiful.
They even don't understand that all these measure are going to trigger a flow of funds and skills out of the EU to more friendly places in Europe, Asia, Middle East and the US.
Barring European investors buying offshore funds will not improve the euro-zone economy and its imbalances, the root of the problem. It will only reduce their return on investment. In an open world, there is no point to become introverted, it is the surest receipt for a prolonged sub-average growth and durable impoverishment of Europeans. More regulation in Europe will lead to more outflow.
To European individual investors, don't worry, open accounts outside the EU and be free to invest in the best of breed that suits your risk/return profile.
In the meantime, the euro will continue falling (I wonder whether the European politicians, beside the rhetoric, are not doing everything possible to push the euro down).
Look at European stocks that will benefit from the euro fall and continue to remain clear from banking stocks. Precious metal have probably entered a consolidation phase and will provide entry points during the summer.
Finally, I have not changed my stance: Greece will default whatever it will be called.
The Economist: The AIFM directive - An other European mess