Friday, November 9, 2012

Risk Sharing: US and EU Compared

Over at VoxEU, Mathias Hoffmann has a very interesting piece comparing risk sharing among US states compared with risk sharing among member states of the EU. One recommendation that follows from his argument is that European integration could be furthered without complex and politically impossible treaty modifications by taking steps to encourage more cross-border equity ownership in Europe. Currently, European investment takes the form primarily of direct investment or bank borrowing by large firms. Trans-European stock ownership is feeble compared to the US. For Hoffmann, equity ownership is one channel via which asymmetrical shocks can be alleviated by transmission to other states. Worth reading.

2 comments:

FrédéricLN said...

Quite curiously, many French people think (for example, Luc Ferry wrote me something like that that on Twitter) that there are no States bankruptcies in the US, because the Federal government always provide as many funds as requested for bailout. And they insist the European Union should do the same.

I'm not sure whether they know what "federalism" really means :-)

FrédéricLN said...

(Of course my previous comment was out of the topic — if inspired by it).

The argument of Mr Hoffmann est mathematically right, but the infrastructure of a financial market is an information market. There is no correct cross-border information, because we speak different languages and live in quite different civilizations — we just don't understand how a Dutch or Spanish firm is managed. We should not invest in it — because, in order to earn money with stocks, you need to understand how it works better than other stakholders do.

Granted, you can also "acheter de l'indice" (buy an index?), or buy stocks of banks which will invest in various industries of the foreign country. You may reduce risk this way. But don't tell it to the French banks who have bought Greek financial institutions!

After all, the Erasmus programme (RIP Franck Biancheri) may be the best driver for transnational investments in the forthcoming years. Because people who have some money will feel they now how businesses in some foreign European country are run. And will like investing there.