Investing in Euroland (Not)

March 24, 2005

From this investor’s standpoint, the Euro investment zone is fragmented, expensive, highly taxed and risky. Did I miss something?

Moving to Europe from the US last year, I set out to build a portfolio of European stocks and bonds.

STOCK

Trading

I’d expected that a Single Europe would have a single ETrade, or it’s equivalent. Wrong. Each country has its own ETrade & you have to live in that country to use it.

Eventually I tracked down a big Swiss bank providing on-line trading across the major European stock markets. Crude compared with ETrade, but it did the job.

Costs

I’d expected ETrade costs of about $25 a trade. Wrong. On a 10,000 Euro stock trade the all-up cost was over 200 Euros. That’s 10 times US costs.

Investing in non-Euro stock proved even more expensive. A collection of taxes at each end and heavy currency exchange charges added an extra 3.5% to each transaction. So Swedish and Danish shares cost an extra 350 Euros on top of the 200 Euro trade cost.

Taxes

Turns out that from an EU investor’s standpoint, Switzerland is part of the EU. The Swiss tax EU folks’ savings at 15%, rising to 35% in 5 years, keeping some & passing the rest to your owning country. You can avoid that by having them give your financial information to your owners. Apparently a mechanism to stop the overtaxed Germans and French hiding their money away. Bizarre the Swiss would agree to dump banking privacy, but they have – one wonders where those German and French have moved their money.

It doesn’t end there, because all dividends you earn are hit with local withholding taxes – for example, your Shell stock gets taxed by the Dutch at 25%. Which you’re supposed to be able to reclaim from your owning country, but if they charge lower rates, you can’t.

I concluded that Euro stock is a loser & dumped the lot. Ouch.

BONDS

Which left bonds. But returns are lousy. And today the European WSJ reports (subscription required) on the EU decision to drop the 3% deficit limits for Germany and France:

The immediate market reaction to the emasculation of the Stability Pact was muted, but the long-term trends are disquieting. A recent study by a major rating agency shows that under current trends all three major euro-zone governments will sooner or later face junk status.

They mean Germany, France & Italy. Double Ouch.

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