Many UK investors are looking towards European stocks in the hope that there’s been a fundamental shift in the region’s prospects. After all we are Europe’s closest neighbour and with Brexit (yes, do we still even remember that) now in full swing, the changing dynamics between Europe and the UK will undoubtedly give rise to great investment opportunities.
However part of the problem has been that “Europe” has too often represented a disparate mix of growth stories and basket cases. Germany has tended to have a solid fiscal position, while being underinvested in public infrastructure. Meanwhile, fiscal constraints have hampered Italian efforts to clean up and recapitalise their banks. For so long, the question for Europe has been whether the politics and institutional framework of the region could finally work together for greater good.
Back in 2012, European Central Bank chief Mario Draghi declared he would do “whatever it takes” to save the eurozone from collapsing under the weight of the region’s mounting debt crisis. And at various times since then, the ECB has talked and acted tough about how it would stimulate the region’s economy. More than EUR1trn was spent on a quantitative easing program focused on stirring regional growth and spurring inflationary pressures. Yet the scheme had limited success.
Even cutting interest rates to take the deposit rate into negative territory, forcing banks to pump more money into the region's financial system, failed to have the required impact.
Europe has limped from one crisis to the next in recent years. The policy response of quantitative easing and negative interest rates was a similar approach to Japan. But like in Japan, there has been a concern that the central bank may have reached the limit of its ability to stimulate.