We've taken a pretty complicated stroll through the data and the issues in first,
the European Union as the world's largest trading area,
and an example of very intense economic integration among countries.
Then through Spain, a country that belongs to the Euro,
meaning it's very, very intensely integrated with other countries,
and seeing how its membership in the Euro affected
its ability to face a financial crisis in recession.
Finally the UK, which was less integrated into the EU,
and has made the decision by popular vote to
leave this trading bloc and go out on its own.
So, there are a lot of issues presented there.
But as we said earlier,
our objective in this course is first of all to see what stories we can read from data.
We've done some of that in this section as well.
Looking at the countries data,
seen what we learn about their growth strategies,
about the size of their markets,
the opportunities and risks that they present.
The second thing that we promised to do,
was to think about the countries from a company perspective and say,
okay what risks do I find here?
What opportunities do I find here if I want to invest?
Here we have some interesting contrasts between these countries,
and thinking about the EU as a whole.
The EU provides enormous opportunities for investors.
It is the world's largest trading area,
with a very large population,
a high income middle class,
which is also large because equality is better in the EU than in the United States.
It's stable because of this equality.
It's an easy place to do business as the institutional indicators show us.
We indicated that the debts are high for the EU,
and looking at Spain and the UK in particular.
But looking through what makes a debt risky or what does not make it risky, it's okay.
There is some institutional risk involved with
Spanish labor markets which we touched on very quickly,
which they've been quite rigid.
But the Spanish did carry out a reform,
a structural reform in 2012 as part of their attempt to recover.
This has reduced the risks in their rigid labor market.
It's hard to overestimate the great opportunities offered by the EU,
and the fact that when a country joins as Spain did for instance in 1986,
suddenly an investor who is thinking of investing in Spain is not thinking just of Spain,
he or she is thinking of this enormous community that now Spain is a part of,
where goods flow freely across borders.
Where there's no customs to stop you,
there are no special regulations to stop you,
there are no tariffs to stop you.
In the case of Spain, there's not even exchange rate risk,
or transaction costs involved with changing currencies to stop you.
So, this makes investment in any EU country a great opportunity.
Are there risks?
Yes. There are, and they are different in the two cases of these countries.
Spain, which decided to opt for very deep integration into the EU,
meaning that it joined the Euro and it belongs to
all EU policies including the Schengen Agreement,
free movement of workers,
of individuals across borders without any customs checks.
Spain found itself doing extremely well before the crisis,
but once the crisis hit,
it discovered the reality of having very few policy tools.
We mentioned that countries only have four tools.
A country that joins the Euro gives up
monetary policy and exchange rate policy as an independent policy tool.
Additionally, we said that Spain faced constraints on using fiscal policy,
because markets doubting Spain,
believing Spain would need to be bailed out,
raised interest rates, and Spain found it very
costly to borrow and its debt soared as a result.
So, there are fiscal risks there involved with that difficulty to borrow,
but in a deeper sense,
it means that as long as there are not mechanisms within
the EU that help out a country like Spain,
automatically as we saw in the United States,
an EU country, a Euro-zone country excuse me,
that goes into crisis is going to face a long crisis,
a hard crisis with flagging demand probably for a long period and possibly deflation.
So, this is a risk for investors if they contemplate a Euro-zone country.
Also, we need to remember that Spain converted in
this process from a current account deficit country,
which is a country that imports more than it exports from the rest of the world
and therefore relies on the rest of the world for financing,
but not for demand in order to grow.
Spain used to be that kind of country in the crisis as it was
desperately seeking a way to grow in a way that reminds us of Japan.
It became a current account surplus country,
meaning that it was exporting more than it imported to
the rest of the world and its risks changed.
A current account surplus country is now
a country that relies on foreign demand in order to grow.
A country that is very dependent on the value of its currency,
a country that ends up lending money to other countries so they will buy its exports.
So, Spain remains a current account surplus country.
This will be a risk that it faces.
So, this is a situation of Spain.
Now, a very different situation is the UK which we explored as a country that's
thinking about- that is in
the process of leaving the EU unless something very important changes.
Here we have the risks that are involved in
breaking the economic integration that offered so many opportunities to investors.
Obviously, an investor will not perceive
the much smaller UK economy in the same way as they would
perceive the UK economy integrated into
this union of 29 countries with which it had free trade,
customs free flow of goods and services.
It is a country that can now rely on less foreign labor to cover job opportunities,
and this also limits its potential.
But I would say that
a really interesting and relevant risk in the UK is the risk that countries face.
If they decide to globalize intensely,
and they don't take the necessary steps of number one,
communicating the benefits of globalization to their population.
Number two, compensating the losers from globalization.
Now, the UK is a country that was deeply integrated into the EU,
it had agreements as we mentioned for air transport,
for trade of course,
trade with other countries,
outside countries and we didn't mention even defense and security policies,
other policies where the UK all forms part of the EU framework.
There are a lot of risks involved in seeing these agreements unwound,
because an investor doesn't know what the framework is going to look like going forward,
what the UK's arrangements are going to be going forward.
Therefore, it's likely to attract less investment during this period of uncertainty.
Again, I think the UK highlights for us the risk of
embarking on globalization without taking into account that although we all win,
there's a group of losers,
and we need to make sure that our policy is oriented towards taking care of those losers.
So that these great risks that have broken open in the UK,
and that will probably discourage investment for some time to come,
do not become realities.
Gayle AllardProfessor
