ULI conference oscillates between doom-mongerers and optimists

Concerns about the real economy cast shadows on shoots of optimism during a lively discussion among a trio of leading economists at the ULI Europe conference in Paris this week.

Europe remains in the grip of a severe double-dip recession and a long haul is still ahead, but it is not all gloom and doom, according to Jean-Michael Six, chief economist Europe at Standard & Poor’s. Spain booked ‘spectacular’ improvement on its government deficit in 2012 and the spreads on government bonds in Europe’s troubled periphery countries have fallen significantly in the past few months, he noted in a keynote address.

Nevertheless, there are signs that the monetary policies of European governments are not benefiting the real economy. A key concern, Six said, is that the improved profitability of much of the corporate sector in Europe with the notable exception of France is not translating into additional investment across the continent.

Pointing to a recent study on capital expenditure by the top 1,000 companies in Europe, Six noted that a rising number are turning their attention to destinations beyond Europe’s borders. No less than 42% are investing outside Europe compared to 27% before the crisis, he said: ‘Corporations are starting to invest, but we’re not seeing the benefits in Europe.’

As a result, Europe’s prospects of anything more than a shallow recovery remain dim and it is not unthinkable that Europe will become the next Japan with an extended period of stagflation. But Six said there was also reason for optimism. ‘There’s also a chance that we will see more innovation and entrepreneurship developing in some of those economies. There are great opportunities on the environmental side,’ he said, pointing to the example of the US. 'Jumping to the most negative conclusion would be premature. ‘

While rising interest rates and currency turmoil remain the biggest potential threats to economic recovery, longer term productivity is also a key issue, professor Arthur Segal, Poorvu Family Professor of Management Practice at Harvard Business School, noted. ‘Structural impediments to the euro’s success are resistant to change,’ he said, pointing to labour relations in France which he described as ‘utopia’. ‘Unless there are changes, we can’t have the recovery that we’re hoping for.’

A ray of light is the Chinese economy which has become a greater engine for international trade flows than Japan during the past five years. ‘China is coming back and we’re seeing serious momentum. That will be particularly helpful this year.’

Professor Andrea Boltho, University of Oxford director at Oxford Economics, also expressed concerns about the further progression of Europe’s Economic and Monetary Union (EMU). ‘At this point in time, we’re going sideways as far as EMU is concerned. It’s subject for conversation not action. My concern is that this is not sustainable. We can’t stay in this state of uncertainty, we need to make improvements. As soon as markets relax, the danger is that we become less vigilant.’