Jens Ehrhardt: Angela Merkel is right in rejecting Eurobonds

Germany’s most experienced independent asset manager has said his embattled Chancellor is right to reject the introduction of Eurobonds, and adds Germany “has already done all it can to stimulate growth” among its neighbours.

Jens Ehrhardt, founder of DJE Kapital in Munich in 1974, and fund manager of the Gamax Funds FCP, says: “One can only applaud Chancellor Angela Merkel for her stance”.

He adds some Eurozone investment markets, especially in his homeland, do not necessarily reflect the macro picture.

Ehrhardt’s Chancellor faces growing pressure from Spain and Italy to ditch austerity, and instead share in the liability for new borrowing by Eurozone sovereigns.

Ehrhardt (pictured) says Merkel should not – not least because it would kill Germany’s interim recovery, which is increasingly important to support the Eurozone’s survival.

Eurobonds would also “eliminate all motivation for the Mediterranean countries to stop their extremely unsound financial practices. Pressure from Germany is the only thing that can prevent the other European countries from carrying on with their irresponsible economic policies,” he adds.

In any case Germany already contributed “tens of millions of Deutschmarks” to the EU budget even before the euro was launched, “providing substantial economic impetus to other member states”.

More recently the country’s economy – including its resilient export sector fuelling $1200bn sales to the US and China alone, and 80% of its total GDP – has been one of few healthy crutches to the Eurozone’s continuation.

“These realities tend to support the position of Germany’s government with respect to Eurobonds,” Ehrhardt says.

The veteran manager believes the EU will not allow Spain nor Italy to fall, but he warns Spain’s banks are “more or less dead in the water”, credit flows have “dried up”, and April’s 8.3% contraction in national industrial production was “much more than the expected 6.5%”.

Meanwhile, he sees Greece’s second round of federal elections this week as “determining whether the country will ultimately exit the single currency bloc”.

He describes the picture in these two countries as one of “economic turmoil, currency evisceration, indebtedness and democratic destabilisation facing the Eurozone”.

Despite all this, he is positive on equity investments, saying the pessimism in markets has meant shares have switched “from weak to strong hands that hold on to them long-term.

“Despite the ongoing uncertainties in Europe, especially when it comes to Greece and Spain, and looking at the declining growth numbers in China, this means that markets are technically primed for prices to rise.”

Before this happens, though, he warns the euro could fall to $1.20, resulting in a higher volume selloff.

He adds the ongoing weakening of the trade-weighted euro should exert “a positive impact on European markets. The ECB can combine its injection of more than €1trn to the banking sector, with liquidity policies and even lower interest rates to depreciate the currency and provide impulses for the EMU economy – as well as helping to save the euro.”

Of his homeland’s investment markets, Ehrhardt says: “The real estate sector is another popular target [and] Germany has managed to avoid formation of a bubble in property prices. Foreign investors are also currently active in the German real estate market, as an appreciation of currency in the long term will be forced by the strength of the marketplace. This in turn should serve to render currency gains for other European investors.

“As long as interest rates in Germany remain at such low levels, this will bolster the domestic economy and the property market will continue to thrive. The resulting wealth effects should serve to further strengthen domestic economic activity and consumption.”

For more of Dr Ehrhardt’s views, see Investment Europe’s website on Monday.


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