Closer fiscal union and the introduction of eurobonds will do nothing to solve the deep structural problems afflicting Europe, according to Frances Hudson, global thematic strategist at Standard Life. 

Hudson says that because the different economies in the eurozone have such a wide range of needs, and because so many of them have such poor demographics, any solution along the lines currently envisaged can’t pull the region out of its slump. 

She claims that whatever is being said now, there is likely to be a eurozone break-up at a later stage of the crisis.

"I am not convinced the solution for the eurozone is more togetherness. A realistic outcome of the global crisis is strong trading blocs," she said. 

"The ones that seem to have worked have been those like NAFTA, where all the member countries have benefitted." 

"The Commonwealth also worked quite well in the past as there was a symbiotic relationship then between the resource-poor UK and the other countries which had need of its technology." 

Hudson thinks that the ongoing crisis is leading to increasing competition among countries to protect their national interests and industries. 

Any move to closer union among the eurozone countries, she explains, would push those countries outside the bloc further away, and that would include newer member nations such as the Czech Republic and Poland, as well as the UK. 

This increasing competition is also being seen in the fight over centralised banking regulation, which would give a continental regulator authority over the City, but also hand the European authorities more power to keep money inside the eurozone. 

"One of the consequences of low growth is that people will fight harder to keep hold of their slice of the pie," she explained. 

Hudson’s strategy unit uses growth accounting to understand long-term shifts in economies by dividing them into the capital-driven and labour-driven, then analysing their demographics. 

The contribution of labour and capital to economic growth in each country can then be plotted on an annual basis.

The analysis informs the investment decisions made on Standard Life Global Absolute Return Strategies, the largest fund in the IMA Absolute Return sector. 

The fund, which aims to provide an equity return but with a third of the volatility, is the sector’s third-best performer over three years, returning 33.04 per cent to investors.

The average fund has returned 9.51 per cent over this period, while the portfolio’s LIBOR GBP 6m benchmark has delivered 3.32 per cent. 

Performance of fund vs sector and index over 3-yrs


 
Source: FE Analytics

Understanding whether an economy is capital- or labour-dominated helps Standard Life’s strategists to analyse the long-term outcome of political and economic decisions. 

Hudson gives the example of Greece as a labour-oriented economy, and says it is naive to think that policy designed for a capital-orientated economy such as Germany can be applied there. 

She says the problem has been made worse by an interest rate policy that has been set for northern European economies such as Germany and is harming peripheral countries such as Greece and Spain. 

Hudson is scathing about those who believe emerging markets will pull the world out of its slump.

"It’s like believing in Father Christmas," she said. "The emerging world is not going to get a free ride. Who are they going to manufacture for? Who are they going to sell to?" 

"As long as the US was the world’s consumer, China had a market to sell into but for China to become a consumer market will be quite hard to accomplish." 

"China has no pension industry, no functioning bond market, and the one-child policy will hold it back down the line. People can exaggerate its economic development," she finished.