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InvestmentResearch Sunset Boulevard – An Interim Report on the Development of the European Monetary Union Werner Krämer, Managing Director, Economic Analyst The introduction of the euro was implemented very quickly, culminating i�n 1999 when the common currency began circulation, which occurred before many outstanding questions had been r�esolved. The policies that composed the European Monetary Union’s (EMU) legal and economic foundation conta�ined many cursory and often contradictory points. Consequently, the euro countries came under pressure during the �financial crisis in six interdependent areas, including: liquidity, banks and the broader financial system, sovereig�n debt and solvency, balance of payments, competi- tiveness, and economic growth and the labor market. These problems resul�ted in an all-encompassing systemic crisis of confidence. In our view, the combination of measures that the European Central Bank �(ECB) introduced in response to the crisis with the goal of stabilizing the euro zone have substantially reduced the sho�rt-term tail risk of its disintegration. Nevertheless, we believe the ECB’s decisions in recent years must be viewed critica�lly. Democratic process and communication with the public fell by the wayside throughout many phases of the process due� to the high degree of pressure faced by deci- sion makers. From our perspective, the manner in which the “no-bailout” clause was forced through raised doubts about the political sector’s willingness to openly communicate decisions. �Moreover, the public’s disenchantment has led the population to find its political voice through an emergence of protest� parties. In the current environment, we are left with mixed conclusions. We belie�ve the euro and the EMU will remain intact, because the backstop set up by the ECB has mitigated some tail risks and� investors may feel reassured by this rela- tively safer backdrop. However, the euro currency is not the solution we� were promised. Further European integration currently remains a distant objective and future episodes of volatility �seem likely. 2 Goals of the European Unification Outbreak of the Euro, Sovereign Debt Process Crises, and Reform Process Above all, the following four goals have been pursued through the The 2008 financial market crisis mercilessly exposed the weaknesses European unification process, which began after World War II and of the EMU’s structure. Since the financial crisis, politicians have, has continued through the (rushed) introduction of the euro after metaphorically speaking, been performing open heart surgery with- Germany’s reunification. 1 out anesthetic on the very foundations of the EMU. Holding to the 1. Achieve enduring peace: Foster mutual dependencies and shared metaphor, this is, by its very nature, substantially more difficult than preventive care to avoid an operation altogether. values in an effort to create enduring peace. 2. Integrate Germany into the unification process: The experience of During the crisis, as is often the case in the political process, several both World Wars led to an objective to contain power aspirations overdue reforms were not executed until the political sector had its and restrain European dominance. back against the wall. The disadvantage of this course of action was 3. Increase prosperity by means of a single internal market: Introduce that changes were hastily cobbled together under the pressure of the crisis, which later necessitated constant corrections. As a result, the a unified market, based on the US model, in order to achieve prosperity, create a more dynamic economy, and improve global general public doubted political transparency, which made the course of the crisis unnecessarily severe and volatile. competitiveness (end of “Eurosclerosis”). 4. Maintain Europe’s global political weight: Protect Europe’s global A statement by former German Chancellor Helmut Schmidt, which political position and unite the region amid the growing claim of was quoted in the weekly periodicalDie Zeit, we believe best illustrates emerging nations. the mood of the general public: “The heads of state and finance minis- While the European unification process was very gradual and incre- ters have invented one rescue mechanism after the other, one is called ESM, the next EFSM—or something—endless abbreviations that I no mental during the first several decades after World War II, the process 3 began to accelerate in the 1980s and, in particular, the 1990s. This longer grasp.” acceleration was triggered by German reunification in 1990, which Nevertheless, in recent years there has been substantial progress toward� had come as a complete surprise to most European politicians. containing the sovereign debt crisis and improving the EMU’s legal The desire to quickly integrate the newly united Germany unleashed function. In addition, the EMU has shown considerable improvement in its political operation at the supranational, bilateral, and national vigorous broader unification activities in Europe. As previously men- tioned, the introduction of the euro was implemented very quickly, levels. The euro zone’s long-term survival has been made substantially more likely by the institutional reforms that have been achieved. before questions such as a federal state versus confederation of states, and economic and monetary union versus political union, had been In addition to the introduction of protective barriers for the addressed. In our view, the fundamental legal and economic setup of euro—namely, the European Financial Stability Facility (EFSF), the the EMU was underdeveloped and contradictory. Politicians and citi- European Financial Stabilization Mechanism (EFSM), the long-term zens did not have a clear understanding of some of the consequences European Stability Mechanism (ESM) rescue package—and the new of the treaty structure. role of the ECB as the “lender of last resort,” a number of individual Exhibit 1 Key Components of the Reform Packages Six Pack Euro Plus Pact Fiscal Treaty Two Pack Fiscal Policy • Reform of the preventative • Obligation to establish • Obligation to establish • Join budget plan and corrective arm of the national fiscal rules national fiscal rules (debt • Closer monitoring of member Stability and Growth Pact (SGP) limitation) states in the deficit procedure • Requirements on the • Voting using reverse budget policy frameworks qualified majority in the • Increased monitoring of states of member states (among deficit procedure with serious difficulties other things: national fiscal rules) with respect to financial stability Macroeconomic • Introduction of Imbalances macroeconomic monitoring and a procedure in the event of excessive imbalance Growth and • European semester • Obligation to take measures Structural (increased coordination of to promote competitiveness Reforms economic and budget policy) and employment As of 2012 Source: German Council of Experts 3 measures have been introduced with respect to fiscal policy. These include initiatives to improve macroeconomic imbalances, and, to a Exhibit 2 Yields on 10-Year Government Bonds limited extent, growth and structural reforms, which are outlined in Exhibit 1. 4 (%) 16 The 2008 financial market crisis shook the EMU to its core. This Italy France Ireland shock was caused by imbalances that had arisen, due to a lack of 12 Portugal Germany Spain Belgium Netherlands coordination, and the fact that countries in the EMU had not grown 8 together since the introduction of the euro. Instead, they had continu- ously drifted apart. This was true, for example, in respect to labor 4 market policy, wage and income policy, state finances, competition 0 policy, and productivity trends. 2000 2002 2004 2006 2008 2010 2012 Prior to the outbreak of the financial crisis, the EMU was a long way As of 7 June 2013 from achieving its original goals, and was instead consistently moving Source: Thomson Reuters Datastream away from them. Thus, we believe the crisis was overdue, as a correc- tion was inevitable amid these undesirable developments. In our view, one could criticize the market for taking so long to recognize and price in the disparities and false incentives. However, in our opinion, Exhibit 3 Credit Default Swap Spreads for Select European Banks the crisis arrived early enough for the region to benefit from the out- comes in the long term. If the political sector earnestly seeks a proper Name, current (bps) 5 Intesa Sanpaolo, 309.7 response to the crisis, the euro zone could potentially even improve. BBVA, 258.0 Santander, 256.4 RBS, 189.6 Six Interdependent Sub-Crises Societe Generale, 183.84 Commerzbank, 177.0 The euro zone countries came under pressure in six inter-related areas, Lloyds, 158.7 which we believe cannot be viewed independently of one another. The Barclays, 144.9 BNP Paribas, 141.9 following six sub-crises combined in phases to become an all-encom- Standard Chartered, 128.5 passing systemic crisis of confidence, when all European institutions Deutsche Bank, 115.6 Current 6 Handelsbanken, 99.8 3-Year High came under an indiscriminate suspicion of failure. HSBC, 94.6 DNordea, 66.1 Liquidity 0 100 200 300 400 500 600 700 The liquidity crisis was the component that most observers perceived (bps) as the actual EMU crisis. Triggered by the general lack of liquidity in As of 7 June 2013 the markets during the financial crisis, the weakened EMU peripheral This information is for illustrative purposes only. The securities menti�oned are not necessarily held by Lazard for all client portfolios, and their mention �should not be countries came under pressure when the securities they issued no longer considered a recommendation or solicitation to purchase or sell these se�curities. It had buyers. These countries were only able to refinance at extremely should not be assumed that any investment in these securities was, or wi�ll prove to be, profitable. inflated costs, and in some cases were unable to refinance at all. Source: Thomson Reuters Datastream In an attempt to defuse these problems, the EFSF, EFSM, and ESM rescue packages and their associated liability guarantees were intro- duced in May 2010, and ECB President Mario Draghi announced Banks and the Broader Financial System in July 2012 that the central bank would do “whatever it takes” to We believe the EMU banking crisis is directly connected to the liquid- save the euro. In addition, Draghi’s speech also implicitly meant ity problem. The close interrelationship of governments and banks the “threat” of unlimited purchases of government bonds from the in state financing put the European banking system—which already euro countries. faced serious challenges as a result of the general financial market In particular, by assuming the role of “lender of last resort,” which was crisis—under additional pressure due to refinancing problems in many countries. At times, the risk of a real core meltdown in the European always the role of the central banks in the Anglo-Saxon model, the financial system was eminent. In particular, the reorganization of ECB was able to temporarily calm market sentiment and ensure that Greece’s debt, which was anticipated early in the crisis, and the coun- the EMU countries could secure short- and medium-term financing. try’s associated banking problems, triggered a moderate upheaval. The ECB’s safety anchor is one of the reasons for the strong decline in euro zone government bond yields. In particular, we believe the The banking crisis and the state financing liquidity problem were decline of the peripheral countries’ bond yields during recent quar- temporarily contained by the role of the ECB as “lender of last resort,” ters, as shown in Exhibit 2, can be attributed to market participants’ even though the exact procedures to assist ailing banks and the best unwillingness to bet against the essentially unlimited depth of the method of liquidation or recapitalization remain unresolved. central bank’s pockets. The credit default swap spreads of bank bonds, which are shown in Exhibit 3, have substantially narrowed during recent months, particu- larly subordinate bonds. 4 Nevertheless, it would be wrong to suggest that the monetary Sovereign Debt and Solvency transmission mechanism from central banks to regional banks (and Although it may not appear so at first glance, the solvency problem ultimately to the real economy) has been restored, as it appears mutual should be viewed as largely independent of the liquidity problem. The distrust between banks is still strong which, in effect, hampers the debt levels of most euro countries, which had already increased over interbank market. After the financial market crisis, officials in the the decades, rose even more sharply during the financial crisis bank United States solved many of the country’s banking problems more rescues. In some countries, such as Greece, Cyprus, and Portugal, efficiently than those in Europe, where a number of “zombie” banks indebtedness is no longer viable in the long term, and must be reduced within the fragmented market were artificially supported for national on a more permanent basis. The ESM’s liability guarantees or the interests. ECB’s bond purchases can ensure the securities’ liquidity, but since Despite the current stabilization of European banks, the market for that does not reduce debt, it scarcely contributes to an improvement loans to small- and medium-sized enterprises (SMEs), which are in solvency. included as part of loans to the private sector in Exhibit 4, remains Thus far, an attempt has been made to get the peripheral countries’ highly disrupted. Banking markets remain fragmented. The interest debt under control through strict austerity measures. These peripheral rates and contractual structure of bank loans to SMEs in different countries have extraordinarily contained their budget deficits, as regions can persistently be characterized by an extreme north-south shown in Exhibit 5, and have, to some extent, been successful in their gap. Many SMEs on the periphery remain almost completely cut stabilization programs, contrary to widespread public prejudices in off from the credit market. This poses a significant problem, as core countries. these SMEs compose a large portion of the market. This is not just in Germany, but also in Italy and Spain, where these organizations employ 80% and 67% of the working population, respectively. Exhibit 5 Possible measures to revitalize the SME market by means of uncon- Budget Balances in Select European Countries ventional policies are a major, but so far controversial, topic of Country 2006 2007 2008 2009 2010 2011 2012 discussion at the ECB and European Union (EU) Commission. 7 Cyclically Adjusted Primary Balance(%) Greece -3.7 -5.4 -8.3 -13.1 -6.1 -1.5 0.9 Exhibit 4 Ireland -3.5 -7.0 -10.7 -9.2 -6.3 -4.6 -2.3 Loans to the Private Sector Italy -0.0 1.7 -1.7 1.2 1.0 1.8 4.7 Portugal -1.3 -1.4 -1.5 -6.7 -6.9 0.1 1.0 YoY Change (%) 10 Spain 2.1 1.4 -4.2 -8.5 -6.2 -5.4 -2.2 8 Primary Balance (%) 6 Greece -1.3 -2.0 -4.8 -10.4 -4.7 -2.2 -1.7 4 Ireland 3.9 1.0 -6.2 -12.1 -27.9 -9.6 -4.4 2 Italy 1.0 3.1 -2.2 -1.0 -0.3 0.8 2.6 0 Portugal -1.3 -0.6 -1.0 -7.5 -7.1 -0.6 -0.7 -2 Spain 3.3 3.0 -3.1 -9.9 -7.9 -7.0 -4.5 1992 1996 2000 2004 2008 2012 b Actual Financing Balance (%) As of 10 June 2013 Greece -6.0 -6.8 -9.9 -15.6 -10.5 -9.1 -7.5 Source: Thomson Reuters Datastream Ireland 2.9 0.1 -7.3 -13.9 -30.9 -12.8 -8.3 Italy -3.4 -1.6 -2.7 -5.4 -4.5 -3.8 -2.7 Portugal -3.8 -3.2 -3.7 -10.2 -9.8 -4.2 -5.0 The current dispute among EU member states concerns financial Spain 2.0 1.9 -4.2 -11.2 -9.4 -8.9 -7.0 market regulation and the European banking union, particularly with Debt Level (%) regard to the three areas of the European Supervisory Authorities, the European Bank Restructuring Agency, and the national and European Greece 107.3 107.4 112.6 129.0 144.5 165.4 170.7 deposit insurance. The outcome of this dispute will be a critical factor Ireland 24.8 25.0 44.5 64.9 92.2 106.5 117.7 for the long-term stabilization of the European banking system, and Italy 106.1 103.1 105.7 116.0 118.6 120.1 126.3 thus the EMU. Portugal 63.7 68.3 71.6 83.1 93.3 107.8 119.1 Although it is possible to have extended arguments about whether Spain 39.7 35.3 40.2 53.9 61.3 69.1 90.7 deposit insurance should be implemented nationally or on a As of 31 December 2012 European-wide basis, one thing is clear: the banking crisis is not over. Without an acceptable solution for a banking union, the crisis could a Financing balance, minus interest expense, adjusted for economic compone�nts in relation to production potential return. We believe only structural reforms, not the central bank, can b In relation to the nominal GDP Source: IMF secure a lasting solution for the financial system. 5 Exhibit 6 Exhibit 7 Government Debt Levels for European Countries as Euro Countries Net Balance of Payments as a Percentage of GDP Percentage of GDP (%) (%) 180 10 160 5 140 120 0 100 80 -5 60 -10 40 -15 20 1996 2000 2004 2008 2012 2000 2004 2008 2012 Austria France Ireland Portugal Belgium Germany Italy Spain Belgium Germany Italy Spain Euro Zone (12) Greece Netherlands Finland Greece Netherlands France Ireland Portugal As of 7 June 2013 As of 7 June 2013 Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream This drastic remedy for the European periphery was unavoidable national central banks of the surplus countries (e.g., Germany and because of the negative effect that European countries’ simultaneous the Netherlands) had to finance the deficits of the southern countries, austerity measures had on GDP growth, and due to the budget deficits which is not sustainable in the long term, and ultimately led to the feedback loop (i.e., governments cut expenditures with the objective balance-of-payments crisis within the EMU. 9 of reducing the deficits, but this also reduces growth; thus increasing However, the balance of payments is one aspect of the EMU crisis that social insurance payments and reducing tax income, which comes back appears to remain under control as a result of the measures taken in to less overall income for the government, increasing deficits again). recent years. In the peripheral countries, cuts, reductions, and domes- If growing out of debt by means of stronger nominal growth on the tic economic collapse have not only substantially reduced imports, basis of structural reforms is unsuccessful, then there is a threat of but have also increased exports due to an internal devaluation and additional haircuts for individual countries, from a long-term perspec- improved competitiveness within these countries. Thus, the balance tive, as this has already occurred in Greece and, indirectly, in Cyprus of payments for Greece and Portugal are approaching zero, and Spain, through bank deposits. 8 Ireland, and Italy are already showing balance-of-payment surpluses. Although capital transactions have not yet returned to normal as a Exhibit 6 shows the debt levels for many of the European countries. result of persistent bank weakness, this is likely to gradually reduce the Despite austerity efforts, the current trends for some countries are not problem of Target II balances. viable, in our view. This is particularly the case when accounting for each country’s disguised indebtedness as a result of commitments to Competitiveness state pension and health systems, and civil servant retirement pen- From the EMU’s inception until the outbreak of the financial crisis, sions, which need to be honored in the future. Germany’s competitiveness had consistently developed due to the Balance of Payments labor unions wage restraint and the Schröder reforms, which started in 2003. In contrast, the southern countries, in particular, have become The financial crisis has led to a balance of payments crisis in the euro less competitive due to rising wage costs and growing economic rigid- countries, as shown in Exhibit 7. Even though the aggregate balance ity. As a result, the euro zone imbalance continued to grow. Declining of payments of the EMU countries has been largely stable for years, competitiveness can translate to a deterioration of the balance of the differences in the balance of payments of the individual EMU payments and declining growth; this causes debt to rise, the response countries were only sustainable if either the capital account balances, to which is often a tax increase which, once again, leads to declining or the banking systems, were able to offset or refinance the deficits of competitiveness and so on until a crisis breaks, as the problem has the weaker countries. 10 become too big to be ignored. During the financial crisis, these mechanisms came to a standstill. In Since 2008, competitiveness has significantly increased in many the countries with constant balance of payment deficits like Greece, Spain, and Portugal, heavy outflows occurred in the capital account countries as a result of the measures taken during the crisis. Wages and costs have fallen massively, particularly in Ireland, Greece, and Spain. balance, and, in effect, the countries’ deficits could only be balanced France and Italy can be considered problem cases, where progress by means of internal transactions within the national central banks is lacking. Nevertheless, as demonstrated in Exhibit 8, the relative of the ECB system (known as the Target II balances). Therefore, the 6 competitiveness of the euro zone does not appear to be a major con- Exhibit 8 tributing factor to a disintegration of the euro zone in the short term. Relative Real Competitiveness Economic Growth and the Labor Market ECB Indicator Real Competitiveness Index, 1999 = 100 (increase = less competitive) In our view, economic growth and the labor market are at the heart of 140 the euro zone’s problems. For decades, the region has been plagued by Belgium Greece Netherlands 130 France Ireland Portugal weak growth and a steadily weakening labor market. Thus, we believe “Eurosclerosis”, or the ever increasing rigidity of euro zone economies, 120 Germany Italy Spain continues to pose a very real problem. 110 We believe that the persistence of the most recent recession can be overcome by a reduction in austerity and the continuation of 100 expansive monetary policy. However, there are not any forthcom- 90 ing solutions to structurally return the euro zone to a path of higher 80 growth. As a result of softer economic growth and despite weak popu- 2000 2004 2008 2012 lation growth, employment has continued to deteriorate, particularly As of 7 June 2013 among younger generations. Exhibit 9 shows real GDP growth for Source: Thomson Reuters Datastream select euro zone countries, and Exhibit 10 the unemployment rate for some of these. Taken together, one can see that currently most countries are in a state of extremely low growth and, simultaneously, have extremely high unemployment. Over the long term, this can Exhibit 9 Real GDP Growth call into question the effectiveness, and thus the legitimacy, of a mon- etary union. Change Compared to the Previous Year (%) Europe’s steadily declining share of world trade over many years, 15 which is shown in Exhibit 11, can be considered an indicator of Austria France Italy Spain Belgium Germany Netherlands economic weakness. We believe this is primarily due to the rise of the 10 Euro Zone Ireland Portugal emerging markets. However, Europeans seem jaded, as they appear to be unaffected by this dynamic. 5 In our view, the EMU will only be a successful, long-term monetary 0 union when politicians and individuals are willing to carry out and support the heavy lifting of structural reform, which includes: reforms -5 for the labor markets and pension systems, dismantling bureaucracy with respect to company formation (improve the ease of doing busi- -10 ness), and truly opening all markets. Moreover, high-level growth 2000 2004 2008 2012 initiatives across the entire continent, with the objective of overcom- As of 7 June 2013 ing the severe neglect of European infrastructure, could be a helpful Source: Thomson Reuters Datastream collateral solution.1 Evaluation and Outlook Exhibit 10 We believe the combination of measures that were incorporated after Unemployment Rate the financial crisis, such as the introduction of the ESM, the ECB (%) assuming the role of lender of last resort for states and banks, the 30 austerity measures taken in recent years, and multiple institutional Belgium Germany Italy Spain reforms to set up the EMU, have substantially reduced the short-term 25 Euro Zone Greece Netherlands tail risk of a disintegration of the euro zone. France Ireland Portugal 20 In our view, the reforms that were successfully implemented during the crisis are considerable, and far more effective than one may have 15 originally expected from the political sector. Once again, these mea- 10 sures were confirmation that the political system is capable of acting in an acute crisis. 5 Nevertheless, we believe that one cannot overlook the fact that 00 2000 2004 2008 2012 the decisions made over recent years have a slightly bitter taste. Throughout the crisis, the intense pressure on decision makers led to As of 7 June 2013 Source: Thomson Reuters Datastream an extensive lack of communication with the public and an abandon- ment of the democratic process. The “no alternative” argument, by 7 Exhibit 11 Exhibit 12 Share of Global Exports Deutschemark/US Dollar Exchange Rate (%) (%) (DEM per USD) 12 36 4.5 Euro Zone (RHS) Germany Netherlands France Italy 34 4.0 10 32 3.5 8 30 3.0 2.5 6 28 2.0 4 26 1.5 24 1.0 2 22 1960 1970 1980 1990 2000 2010 1995 2000 2005 2010 As of 10 June 2013 As of 7 June 2013 Notional exchange rate starting in 1999. Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream itself, will not generate any enthusiasm for the euro. The emergence itself did not want, as a result of the weakness of the other European of many protest parties, such as Italy’s Five Star Movement and the countries. In this regard, there is a need for the other countries to reor- Alternative for Germany party (Alternative für Deutschland, or AfD), ganize by means of structural reforms—only then will all euro zone illustrates how the public has found its political voice in response to its countries be able to approach one another on equal ground. discontent. In our view, the goal of increasing prosperity through the internal In addition, there has often been, in our view, little concern whether market has fallen far short of its potential. The introduction of the politicians’ decisions were consistent with the law. The forced manner euro did not improve Europe’s weak growth and rising unemploy- in which the no-bailout clause was instituted raises doubts about the ment—rather growth and unemployment have worsened. It is political sector’s respect for treaties. Prime examples include the deci- important to note that, the internal market and the unification process sions regarding the ESM and ECB’s role as a backstop to the crisis, alone do not help to accomplish this goal. Such prosperity is only the path toward community liability, and the inter-European transfer attainable if the internal market arrangement and EMU’s institutional union, which were made without open communication from the framework are structured in such a manner that the internal market political sector. can grow into its potential strength. With the current configuration, The ECB’s policy of unlimited government bond purchases is essen- this has not been the case. tially state financing through the back door—a development that is Finally, we believe the goal of strengthening Europe’s global political only effective as a short-term emergency measure. This following standing remains distant. Today, European nations continue to be as point should also be clearly stated: The goal of the EMU was to create divided as ever. The euro zone has been the center of economic adver- a community of values and laws, and it becomes problematic when sity for some time, so it is not surprising that, at the global level, it 13 common values are largely ignored once a difficult situation arises. appears as if Europeans are not being taken as seriously anymore. A critical analysis shows that we are still a long way from achieving the In the end, a mixed conclusion remains. The euro and the EMU will four main goals of European unification. It is important to recognize remain intact, because the ECB and ESM provide a strong safeguard. that European unification has contributed to a long period of peace However, as previously stated, the euro currency is not the solution in Europe after World War II (excluding the Balkan War in eastern we were promised. Exhibit 12 plots the deutschemark to US dollar Europe). However, the disputes and recriminations between Germany exchange rate over the last 50 years, and illustrates how the euro is not and the periphery, in connection with reduced rescue packages and the as strong as the deutschmark once was. Further, the ECB is not like appearance of the Troika, show that the goal of communal values is the Bundesbank, and we believe it will not be the case that the rest of still a long way off. The cultural differences, the diametrically opposed Europe will become like Germany politically, but rather that Germany concepts of the state in different countries, and the tenacity of these will become a reflection of Europe. differences were clearly underestimated at the start of the EMU. 14 The tail risks are now limited by the ESM and ECB, and even amid It can, at the very least, be disputed whether the goal of containing the difficulty of a markedly low interest-rate environment, some Germany’s claim to power has been achieved by means of integration investors feel relatively safer with regard to Europe. But due to the during the unification process. During the crisis, Germany has moved discrepancies in the EMU structure and the public political processes, into a position of strength and dominance that even the country we believe enough unrest remains to create further volatility. 8 Notes 1 Klaeren, J. (ed.) “Europäische Union, Informationen zur Politi�schen Bildung [European Union, Information on Political Education].” New revised edition, 2012. 2 Krämer, Werner. “Griechenland 2010 – ein Kanarienvogel im Min�enschacht [Greece 2010 – A Canary in a Coal Mine].” Lazard Asset Management, Standpunkt [Opinion], April 2010. 3 http://www.zeit.de/news/2013-05/30/international-helmut-schmidt-wirft-�eu-fuehrung-mutlosigkeit-vor-30121602 4 Franz, W. et al. “Jahresgutachten des Sachverständigenrats zur B�egutachtung der gesamtwirtschaftlichen Entwicklung 2012/13 [Annual Expert Opinion of the Council of Experts on the Examination of 2012/13 Overall Economic Development].” 2012. 5 Heinemann, F. and O. Schmuck. “Euro am Scheideweg? Informationen zu� politischen Bildung aktuell [Euro on the Way Out? Information for current political education].” 2012. 6 Welfens, P. “Euro-Krise – Dynamik und Überwindung [Euro Crisi�s – Dynamics and Overcoming].” Presentation at Bergische Universität Wuppertal, October 2012; Franz, W. “Herausforderungen an die Wirtschaftspolitik in Europa [Challenges fo�r Economic Policy in Europe].” Lecture at the 16th Annual Congress on Porfolio Management, 4 June 2012. 7 http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/s�me-definition/ 8 IMF. “Greece, IMF Country Report No. 13/154.” June 2013. 9 Sinn, H.W. “Die Target-Falle [The Target Trap].” Hanser-Verlag, 2012. 10 Hax et al. “Globale und spezifische Ursachen der Eurokrise [Global �and Specific Causes of the Euro Crisis].” Excerpt from the 2010/11 Annual Expert Opinion, Council of Experts on th�e Examination of Overall Economic Development, 2011. 11 Sidorov, P. “Euroraum – Wie könnten Wachstumsinitiativen im Det�ail aussehen? [Euro Area – How Might Growth Initiatives Look in Detail?].” Deutsche Bank Research, Research Briefing European Integration, 31 May 2012. 12 Fuest, C. “Die EZB bewegt sich zweifellos in einer Grauzone [The EC�B Is Undoubtedly Moving in a Gray Area].” Handelsblatt, 4 June 2013. 13 Klein, H.H. “Überfordert – Die Europäische Union braucht e�ine Reform an Haupt und Gliedern [Overburdened – The European Union Needs A Reform From Tip to Toe].” FAZ, 31 May 2013. 14 Mak, G. “Was, wenn Europa scheitert [What if Europe Fails].” 201�2. Important Information Published on 21 October 2013. Past performance is not a reliable indicator of future results. This paper is for informational purposes only. It is not intended to, an�d does not constitute, an offer to enter into any contract or investment agreement in respect of any product offered by Lazard Asset Management and shall not be considered as an offer or solicitation� with respect to any product, security or service in any jurisdiction or in any circumstances in which such offer or solicita- tion is unlawful or unauthorized or otherwise restricted or prohibited. Information and opinions presented have been obtained or derived from so�urces believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opin- ions expressed herein are as of the date of this presentation and are su�bject to change. An investment in bonds carries risk. If interest rates rise, bond prices� usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you� do not hold a bond until maturity, you may experience a gain or loss when y�ou sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal� payments. Other risks, including inflation risk, call risk, and pre-pa�yment risk, also apply. Equity securities will fluctuate in price; the value of your investmen�t will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatil�e, and less subject to governmental supervision than in one’s home marke�t. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws,� changes in government administration, and economic and monetary policy. Australia: Issued by Lazard Asset Management Pacific Co., Level 39 Gateway, 1 M�acquarie Place, Sydney NSW 2000. Germany: Issued by Lazard Asset Management (Deutschland) GmbH, Neue Mainzer Strasse 75, D-60311 Frankfurt am Main. Japan: Issued by Lazard Japan Asset Management K.K., ATT Annex, 7th Floor, 2-�11-7 Akasaka, Minato-ku, Tokyo 107-0052. Korea: Issued by Lazard Korea Asset Management Co. Ltd., 10F Seoul Finance Cent�er, Taepyeongno-1ga, Jung-gu, Seoul, 100-768. United KingdFoom r:professional Investors Only. Issued by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Regist�ered in England Number 525667. Authorised and regulated by the Financial Services Authority (FSA). United States: Issued by Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, N�Y 10112. LR23369
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