Keep Your Friends Close, But Your Enemies Closer — Part III

Michael McTague  |

Image: Outgoing Irish Prime Minister Leo Varadkar (left) and newly elected Prime Minister Micheál Martin, June 27, 2020. Source: Houses of the Oireachtas, CC BY 2.0, via Flickr.

December 2021 — Myth Buster

We begin this final piece in our payback series (see

Part I and Part II) with a huge and easily missed financial success story. The small countries in Europe — especially Northern Europe — outpace their larger neighbors in wealth. This may be the most sweeping example of financial payback of all time. Within the euro zone, Germany stands out in Gross Domestic Product (GDP) followed by France, both towering above their smaller neighbors, rivaling the US and Japan. The financial prowess of the UK is now a thing of the past as the mighty euro zone garners more and more riches. Lost in this explosion of wealth is the success of smaller euro zone and their neighbors. 

As of 2020, Germany’s GDP stood at 3.3 trillion euros ($3.9 trillion) leading the continental pack. In per capita GDP, Denmark, which is not in the euro zone, stands at $59,000, topping France’s $46,000. The Netherlands, home of Shell Oil (RDS.A

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), Airbus (EADSY) and Delhaize (ADRNY) with a population of about nineteen million, also ranks near the top of all European nations at $52,200 per capita GDP, on par with the US. Most notable is Ireland, a nation of four million, and which long lagged England including a big gap with once wealthier Northern Ireland (six counties of Ireland’s thirty two). Their fortunes have reversed. Per capita GDP in the emerald isle exceeds $80,000, while the UK including Northern Ireland stands at $42,000.

Seize the Day with Expensive Manufacturing

Part of the formula for success comes from doing what China does but on the higher end: taking the best manufacturing jobs. Pfizer (PFE), Ford (F) and others operate proudly in Ireland. The investment comes from the US and other “trade partners.” Ireland also scores well in financial processing, an industry that thrives on a well-educated, English speaking population that offers a less expensive means of operating than the home countries of the financial powerhouses.

Intercontinental Riches

While less dramatic, the pattern also appears in South and Central America. Chile’s per capita GDP of $15,000 exceeds that of Mexico ($10,000), Brazil ($8,700) and Argentina ($10,000), providing more evidence that small is beautiful or less is more, to be philosophical. Chile’s balanced economy, proportionally large middle class and avoidance of the problems of big cities and too many people working on farms pushed the country into the highly prized emerged category.

Central America follows suit. Panama’s $14,000 per capita GDP and Barbados’s $15,000 certainly top the Latin giants who grab the attention. Observers will note that the Latin nations fall well below the euro zone in terms of wealth, but the evidence reflects the successful smaller economies pattern seen across Europe.

Investors always want to know why. Among the prominent reasons is that small countries avoid the burden of big cities with their many problems, especially crime and massive infrastructure expense. Small countries are not targets for much migration either, mitigating the costs of assimilation.

We’ve Always Done It That Way

Larger countries are more closely tied to older and more expensive industries and ways of operating. One of the interesting features of recent decades is the shift from military strength toward economic vitality. Sanctions replace military invasions. The large countries, however, cannot embrace this trend fully.

In the US, military expense accounts for 3.4% of the entire GDP and, while it shifted downward for years, it will not go away. American soldiers are stationed around the world, and the military forms a large and expensive industry inside the fifty states. For weeks, news in the US was dominated by the huge, expensive military withdrawal from Afghanistan. The big countries are also locked into the weapons industry, or military-industrial complex, doling out huge piles of cash for the latest weapons.

As a single example, some years ago, the US sold $60 billion worth of military aircraft to Saudi Arabia. The amount spent on US military equipment each year is far greater. 

Euro zone countries are not planning any invasions. They are too busy counting their money. Consider the massive change this represents from World War II. France still supports 200,000 military personnel. Cash-laden Norway has only 23,000 active military. To put the European situation in perspective, Fort Bragg alone boasts a population of 54,000 troops.

Greece, which defaulted a few years ago and which has struggled to accept the European mantra of austerity, has achieved the enviable spot of financial support from mighty Germany along with a comfortable position within the euro zone. This small democracy sells its agricultural and pharmaceutical exports to neighbors that share the same currency. While Greece lags most of its western neighbors in wealth, its fortunes shot up as a member of the euro currency group.

Norway, in addition to its huge offshore oil wealth, can easily spread wealth around to its modest five million population, literally doling out cash from its massive oil sales.

The Baltics Score

The former Soviet republics have a dog in this fight as well. Estonia, Latvia and Lithuania, former members of the USSR and proud newer members of the euro zone, exceed the per capita GDP of Russia by a wide margin. The total population of the three countries is roughly seven million compared to Russia’s one hundred forty-six million. Russia possesses a nearly inexhaustible supply of oil and gas, pumping it furiously through the world’s longest pipelines, but it cannot get a leg up on its tiny neighbors in wealth distribution. As the euro, one of the three major currencies, zooms along, the ruble rattles and sinks. 

This myth uncovers juicy examples of payback across the globe. From day traders to small nations, getting even is a real goal and sometimes the results shock. Next month, the Myth Buster will move on to another topic.

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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

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Equities News Contributor: Michael McTague, Ph.D.

Source: Equities News

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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