Ultimately both Europe and the euro will recover despite the dire predictions presently making the rounds
The crisis of the eurozone has rocked markets and again brought into question the stability of the financial system and the strength of the recovery. On its surface, this new crisis would appear to be bad news for investors.
Certainly it is not good news, at least in the short term. Still if you extend the time horizons out a bit further, a different story emerges.
After the devastation of the Second World War, Europe grew at a spectacular rate. In France this period is known as the Les Trente Glorieuses ("The Glorious Thirty"). With the special interest groups swept away by the war, growth benefited all segments of society and the countries as a whole. The growth was given further impetus by the creation of the European Union.
The EU and the euro were supposed to do one thing, encourage economic growth by unifying the market. Market unification of course is a legal problem. If all of the laws, regulations and tax codes could be aligned then seamless trading across national borders would be possible along with growth.
For a time it was very successful. It should be remembered that some of the countries presently so maligned as PIIGS were once lauded for their economic growth. After Ireland and Spain entered the EU their growth rates increased dramatically. Ireland was the Celtic Tiger and Spain had the highest growth rate in the EU after years of stagnation.
But good government policies do not go unpunished. As European economies grew so did the subsidies and regulations. Governments felt that more regulations could solve economic issues and make life better for their citizens. There was no problem that the beneficent hand of government could not solve.
For example in France, in the name of protecting citizens, the French government "sets the dates that shops can hold sales; forbids hypermarkets from selling below cost; limits the number of Paris taxis; and prevents pharmacists from owning more than one pharmacy". The French government employs 8% of the population, almost twice that of the US.
These bureaucracies become self sustaining. Their goal is to protect themselves rather than the rest of the country. A French 'fonctionnaire' retires at 60 at 75% of his or her final six months' salary. The size and cost of the French bureaucracy is certainly impressive but it is not unique. Most of Europe is saddled with massive bureaucracies and of course the costs.
In France 85% of pensions come from the state. This compares with an OECD average of 61% and contrasts with the US where only 36% of pensions are state liabilities. Even worse in both Greece and France the average age of retirement is only 60 compared with 65 in the US and 70 in Japan.
It is not only government employment that clogs the economic system. Most countries in Europe have a two-tiered labour market. There are union workers who have guaranteed jobs, retirements, and healthcare. Then there are the rest, usually the young who suffer from high rates of structural unemployment. As the result of the US recession, America presently has an unemployment rate of 9.9%. This contrasts with Europe where the rate is 10%. But in 2007 the US unemployment rate was 4.4% while Europe's was 7.3%.
The euro crisis then is a symptom of a much deeper disease that has been plaguing Europe long before the present crisis. The use of government and law to solve any problem or to control all segments of the economy has many costs. Not the least of which is that law, any law, any regulation has vast unknown and unintended consequences.
Why then is the present crisis something to celebrate? Laws don't get passed on their own. Certain groups within a political system stand to benefit from a particular legal regime. For example in France there are 35 different groups representing farmers, sailors, teachers and even notaries. Each has an economic stake in the present system and is willing to fight tooth and nail to preserve its rights under that system regardless of any detrimental effect on the general economy. These groups are also not unique to Europe. They exist in varying degrees in all countries. In the US the American Association of Retired People (AARP) is particularly ferocious despite the infirmity of many of its members.
Crises, though, are exceptionally useful. What was considered politically impossible a few weeks ago may actually be feasible today. Real reform invariably removes advantages of a privileged group, which is always difficult and painful. As such, it is invariably put off until there are no other alternatives. Still, over time, once accomplished, the results can be beneficial. The austerity packages making their way through various European parliaments are not only necessary to satisfy the short-term requirements of bond vigilantes; they also will eventually be exceptionally helpful in stimulating economic growth. Not tomorrow certainly. The medicine will be painful as government spending retreats, but what doesn't kill economies can make them stronger. So ultimately both Europe and the euro will recover despite the dire predictions presently making the rounds.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).
Targets EBIDTA margin of 7.5%-8% in the current fiscal
Shopper's Stop, whose net profit rose 197% quarter-on-quarter in the March 2010 quarter to Rs16.43crore, claims to have developed a recession-proof model. Last year, (FY09-10), its EBIDTA (earnings before interest, depreciation and tax) margin was 7.3% and the company expects to increase it to 7.5% -8% in the current fiscal.
The company is targeting to increase its same-store sales growth from the current level of 16% and also ramp up margins. It has brought down its operating cost by 280 basis points and expects to see a further reduction in response to a slew of cost-control measures initiated in the previous fiscal. Moneylife had earlier reported on how the company is controlling its expenses. (see: http://www.moneylife.in/article/4/3222.html).
"We are yet to see the full benefit of our measures to control operating costs. We saw some impact in the last quarter, and we should be able to see its full impact in the current fiscal. We are targeting an EBIDTA (margin) of between 7.5% -8% (in the current fiscal)," said Govind Shrikhande , executive director and CEO of Shopper's Stop.
The company, however, expects manpower costs to increase, as it is giving a lot of incentives to its employees. The company is adding new stores, but mostly on a revenue-share model, which will help reduce costs by 20-30 basis points. Mr Shrikhande said 12 out of the 18 new stores that will be opened in the next 30 months would operate on a revenue-share basis. The remaining stores will operate on a pure rental basis, but at 15%-20% lower rentals than the current rates.
"A combination of all these measures has made our model much more recession proof and we will be able to see good profitability, irrespective of the market conditions," said Mr Shrikhande.
JM and Reliance are denying any deal, but is nothing really brewing between the two?
A media report that multi-billionaire Mukesh Ambani was in talks to acquire a majority stake in JM Financial Asset Management Pvt Ltd, saw the stock of its sister company, JM Financial Limited, blossom and soar a massive 15%-20% in early trades. Especially since the paper also said that the asset management company was being valued at 8% of assets (Rs685 crore), which is almost twice the going rate. The paper did acknowledge that both parties had termed their queries "speculative", however, when Moneylife checked with both sides, they were emphatic in their denial. As media people know, there is a significant difference between terming something as "speculative' (it means that it is still in the realm of possibility) and denying it outright.
So are the Reliance sources and the Kampanis (we spoke both to chairman Nimesh Kampani and his son Vishal Kampani) just being coy until they hammer out something? According to Vishal, “We have not held talks or discussions with any party to sell our fund. It is an important business unit for us and we will continue to grow it.” The Reliance sources, who didn't want to be quoted, were equally emphatic.
But again, can it be smoke without any fire? After all, the JM Financial group has an extremely close relationship with Reliance Industries. Remember how chairman Nimesh Kampani had to stay out of the country for nearly a year because of a default by Nagarjuna Finance, where he was a director? It was common knowledge, then, that the late Y Rajasekhara Reddy, chief minister of Andhra Pradesh, was gunning for Kampani as a way to hit at Reliance. A blog called www.ambanibrotherfight.blogspot.com had even claimed that the genesis of that issue was Nimesh Kampani's investment in Eenadu newspapers, which it claims was on behalf of Reliance's Mukesh Ambani. The case, documented in detail by Moneylife, exemplified the stunning display of political power by a chief minister and the inability of the central government, even at the highest level, to rein him in.
While the truth of that story will never be known (the blog is now dormant, but this story has not been removed or ever denied), the fact is that Mr Kampani has a close relationship with Reliance and paid a huge price for it. Apart from the trauma suffered by him and his family, he also had to stay away from his substantial business in India for an entire year. Given the background, a big investment by Reliance Industries in JM Mutual fund, that too at an extremely high valuation, is not as fanciful as the denials by the two parties would indicate.
Does it mean that Reliance is not buying into the mutual fund business, but elsewhere? Or is it looking at a "strategic investment" rather than a majority investment? Only time will tell. At the moment however, both parties to the potential deal are denying it and the Kampanis insist they are not in talks with “any party”.
Having said that, it is also true that the Mukesh Ambani side of Reliance has shown no previous appetite to manage funds, especially when the returns on pure asset management are shrinking, while the red-tape surrounding the business and its operations is increasing everyday. JM Mutual Fund, which has assets under management of Rs8,569 crore, is not making money and many of its funds have a fairly poor performance record, as frequently reported by Moneylife.