Investment Research

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 in 1999 when the common currency began circulation, which occurred before many outstanding questions had been resolved. The policies that composed the European Monetary Union’s (EMU) legal and economic foundation contained 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, sovereign debt and solvency, balance of payments, competi-tiveness, and economic growth and the labor market. These problems resulted 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 short-term tail risk of its disintegration. Nevertheless, we believe the ECB’s decisions in recent years must be viewed critically. 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 believe 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 ProcessAbove all, the following four goals have been pursued through the European unification process, which began after World War II and has continued through the (rushed) introduction of the euro after Germany’s reunification.1

1. Achieve enduring peace: Foster mutual dependencies and shared values in an effort to create enduring peace.

2. Integrate Germany into the unification process: The experience of both World Wars led to an objective to contain power aspirations and restrain European dominance.

3. Increase prosperity by means of a single internal market: Introduce a unified market, based on the US model, in order to achieve prosperity, create a more dynamic economy, and improve global competitiveness (end of “Eurosclerosis”).

4. Maintain Europe’s global political weight: Protect Europe’s global political position and unite the region amid the growing claim of emerging nations.

While the European unification process was very gradual and incre-mental during the first several decades after World War II, the process began to accelerate in the 1980s and, in particular, the 1990s. This acceleration was triggered by German reunification in 1990, which had come as a complete surprise to most European politicians.

The desire to quickly integrate the newly united Germany unleashed vigorous broader unification activities in Europe. As previously men-tioned, the introduction of the euro was implemented very quickly, before questions such as a federal state versus confederation of states, and economic and monetary union versus political union, had been addressed. In our view, the fundamental legal and economic setup of the EMU was underdeveloped and contradictory. Politicians and citi-zens did not have a clear understanding of some of the consequences of the treaty structure.2

Outbreak of the Euro, Sovereign Debt Crises, and Reform ProcessThe 2008 financial market crisis mercilessly exposed the weaknesses of the EMU’s structure. Since the financial crisis, politicians have, metaphorically speaking, been performing open heart surgery with-out anesthetic on the very foundations of the EMU. Holding to the metaphor, this is, by its very nature, substantially more difficult than preventive care to avoid an operation altogether.

During the crisis, as is often the case in the political process, several overdue reforms were not executed until the political sector had its back against the wall. The disadvantage of this course of action was that changes were hastily cobbled together under the pressure of the crisis, which later necessitated constant corrections. As a result, the general public doubted political transparency, which made the course of the crisis unnecessarily severe and volatile.

A statement by former German Chancellor Helmut Schmidt, which was quoted in the weekly periodical Die Zeit, we believe best illustrates the mood of the general public: “The heads of state and finance minis-ters have invented one rescue mechanism after the other, one is called ESM, the next EFSM—or something—endless abbreviations that I no longer grasp.”3

Nevertheless, in recent years there has been substantial progress toward containing the sovereign debt crisis and improving the EMU’s legal function. In addition, the EMU has shown considerable improvement in its political operation at the supranational, bilateral, and national levels. The euro zone’s long-term survival has been made substantially more likely by the institutional reforms that have been achieved.

In addition to the introduction of protective barriers for the euro—namely, the European Financial Stability Facility (EFSF), the European Financial Stabilization Mechanism (EFSM), the long-term European Stability Mechanism (ESM) rescue package—and the new role of the ECB as the “lender of last resort,” a number of individual

Exhibit 1Key Components of the Reform Packages

Six Pack Euro Plus Pact Fiscal Treaty Two Pack

Fiscal Policy • Reform of the preventative and corrective arm of the Stability and Growth Pact (SGP)

• Requirements on the budget policy frameworks of member states (among other things: national fiscal rules)

• Obligation to establish national fiscal rules

• Obligation to establish national fiscal rules (debt limitation)

• Voting using reverse qualified majority in the deficit procedure

• Join budget plan

• Closer monitoring of member states in the deficit procedure

• Increased monitoring of states with serious difficulties with respect to financial stability

Macroeconomic Imbalances

• Introduction of macroeconomic monitoring and a procedure in the event of excessive imbalance

Growth and Structural Reforms

• European semester (increased coordination of economic and budget policy)

• Obligation to take measures to promote competitiveness 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 limited extent, growth and structural reforms, which are outlined in Exhibit 1.4

The 2008 financial market crisis shook the EMU to its core. This shock was caused by imbalances that had arisen, due to a lack of coordination, and the fact that countries in the EMU had not grown together since the introduction of the euro. Instead, they had continu-ously drifted apart. This was true, for example, in respect to labor market policy, wage and income policy, state finances, competition policy, and productivity trends.

Prior to the outbreak of the financial crisis, the EMU was a long way from achieving its original goals, and was instead consistently moving 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, 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 response to the crisis, the euro zone could potentially even improve.5

Six Interdependent Sub-CrisesThe euro zone countries came under pressure in six inter-related areas, which we believe cannot be viewed independently of one another. The following six sub-crises combined in phases to become an all-encom-passing systemic crisis of confidence, when all European institutions came under an indiscriminate suspicion of failure.6

LiquidityThe liquidity crisis was the component that most observers perceived as the actual EMU crisis. Triggered by the general lack of liquidity in the markets during the financial crisis, the weakened EMU peripheral countries came under pressure when the securities they issued no longer had buyers. These countries were only able to refinance at extremely inflated costs, and in some cases were unable to refinance at all.

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 in July 2012 that the central bank would do “whatever it takes” to save the euro. In addition, Draghi’s speech also implicitly meant the “threat” of unlimited purchases of government bonds from the euro countries.

In particular, by assuming the role of “lender of last resort,” which was always the role of the central banks in the Anglo-Saxon model, the ECB was able to temporarily calm market sentiment and ensure that the EMU countries could secure short- and medium-term financing. 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 decline of the peripheral countries’ bond yields during recent quar-ters, as shown in Exhibit 2, can be attributed to market participants’ unwillingness to bet against the essentially unlimited depth of the central bank’s pockets.

Banks and the Broader Financial SystemWe believe the EMU banking crisis is directly connected to the liquid-ity problem. The close interrelationship of governments and banks in state financing put the European banking system—which already faced serious challenges as a result of the general financial market crisis—under additional pressure due to refinancing problems in many countries. At times, the risk of a real core meltdown in the European financial system was eminent. In particular, the reorganization of Greece’s debt, which was anticipated early in the crisis, and the coun-try’s associated banking problems, triggered a moderate upheaval.

The banking crisis and the state financing liquidity problem were temporarily contained by the role of the ECB as “lender of last resort,” even though the exact procedures to assist ailing banks and the best method of liquidation or recapitalization remain unresolved.

The credit default swap spreads of bank bonds, which are shown in Exhibit 3, have substantially narrowed during recent months, particu-larly subordinate bonds.

Exhibit 3Credit Default Swap Spreads for Select European Banks

0

Name, current (bps)Intesa Sanpaolo, 309.7

BBVA, 258.0Santander, 256.4

RBS, 189.6Credit Agricole, 184.4

Societe Generale, 183.8Commerzbank, 177.0

Lloyds, 158.7Barclays, 144.9

BNP Paribas, 141.9Standard Chartered, 128.5

Deutsche Bank, 115.6Handelsbanken, 99.8

HSBC, 94.6DNB Nor, 76.9

Nordea, 66.11000 200 300 400 500 600 700

(bps)

Current3-Year High

As of 7 June 2013

This information is for illustrative purposes only. The securities mentioned are not necessarily held by Lazard for all client portfolios, and their mention should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable.

Source: Thomson Reuters Datastream

Exhibit 2Yields on 10-Year Government Bonds

20022000 2004 2006 2008 2010 2012

16

12

8

4

0

(%)

ItalyPortugalBelgium

FranceGermanyNetherlands

IrelandSpain

As of 7 June 2013

Source: Thomson Reuters Datastream

4

Nevertheless, it would be wrong to suggest that the monetary transmission mechanism from central banks to regional banks (and ultimately to the real economy) has been restored, as it appears mutual distrust between banks is still strong which, in effect, hampers the interbank market. After the financial market crisis, officials in the United States solved many of the country’s banking problems more efficiently than those in Europe, where a number of “zombie” banks within the fragmented market were artificially supported for national interests.

Despite the current stabilization of European banks, the market for loans to small- and medium-sized enterprises (SMEs), which are included as part of loans to the private sector in Exhibit 4, remains highly disrupted. Banking markets remain fragmented. The interest rates and contractual structure of bank loans to SMEs in different regions can persistently be characterized by an extreme north-south gap. Many SMEs on the periphery remain almost completely cut off from the credit market. This poses a significant problem, as 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. Possible measures to revitalize the SME market by means of uncon-ventional policies are a major, but so far controversial, topic of discussion at the ECB and European Union (EU) Commission.7

The current dispute among EU member states concerns financial market regulation and the European banking union, particularly with regard to the three areas of the European Supervisory Authorities, the European Bank Restructuring Agency, and the national and European deposit insurance. The outcome of this dispute will be a critical factor for the long-term stabilization of the European banking system, and thus the EMU.

Although it is possible to have extended arguments about whether deposit insurance should be implemented nationally or on a European-wide basis, one thing is clear: the banking crisis is not over. Without an acceptable solution for a banking union, the crisis could return. We believe only structural reforms, not the central bank, can secure a lasting solution for the financial system.

Sovereign Debt and SolvencyAlthough it may not appear so at first glance, the solvency problem should be viewed as largely independent of the liquidity problem. The debt levels of most euro countries, which had already increased over the decades, rose even more sharply during the financial crisis bank rescues. In some countries, such as Greece, Cyprus, and Portugal, indebtedness is no longer viable in the long term, and must be reduced on a more permanent basis. The ESM’s liability guarantees or the ECB’s bond purchases can ensure the securities’ liquidity, but since that does not reduce debt, it scarcely contributes to an improvement in solvency.

Thus far, an attempt has been made to get the peripheral countries’ debt under control through strict austerity measures. These peripheral countries have extraordinarily contained their budget deficits, as shown in Exhibit 5, and have, to some extent, been successful in their stabilization programs, contrary to widespread public prejudices in core countries.

Exhibit 5Budget Balances in Select European Countries

Country 2006 2007 2008 2009 2010 2011 2012

Cyclically Adjusted Primary Balancea (%)

Greece -3.7 -5.4 -8.3 -13.1 -6.1 -1.5 0.9

Ireland -3.5 -7.0 -10.7 -9.2 -6.3 -4.6 -2.3

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

Spain 2.1 1.4 -4.2 -8.5 -6.2 -5.4 -2.2

Primary Balanceb (%)

Greece -1.3 -2.0 -4.8 -10.4 -4.7 -2.2 -1.7

Ireland 3.9 1.0 -6.2 -12.1 -27.9 -9.6 -4.4

Italy 1.0 3.1 -2.2 -1.0 -0.3 0.8 2.6

Portugal -1.3 -0.6 -1.0 -7.5 -7.1 -0.6 -0.7

Spain 3.3 3.0 -3.1 -9.9 -7.9 -7.0 -4.5

Actual Financing Balanceb (%)

Greece -6.0 -6.8 -9.9 -15.6 -10.5 -9.1 -7.5

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

Spain 2.0 1.9 -4.2 -11.2 -9.4 -8.9 -7.0

Debt Levelb (%)

Greece 107.3 107.4 112.6 129.0 144.5 165.4 170.7

Ireland 24.8 25.0 44.5 64.9 92.2 106.5 117.7

Italy 106.1 103.1 105.7 116.0 118.6 120.1 126.3

Portugal 63.7 68.3 71.6 83.1 93.3 107.8 119.1

Spain 39.7 35.3 40.2 53.9 61.3 69.1 90.7

As of 31 December 2012

a Financing balance, minus interest expense, adjusted for economic components in relation to production potentialb In relation to the nominal GDP

Source: IMF

Exhibit 4Loans to the Private Sector

1992 1996 2000 2004 2008 2012-2

0

2

4

6

8

10YoY Change (%)

As of 10 June 2013

Source: Thomson Reuters Datastream

5

This drastic remedy for the European periphery was unavoidable because of the negative effect that European countries’ simultaneous austerity measures had on GDP growth, and due to the budget deficits feedback loop (i.e., governments cut expenditures with the objective of reducing the deficits, but this also reduces growth; thus increasing social insurance payments and reducing tax income, which comes back to less overall income for the government, increasing deficits again).

If growing out of debt by means of stronger nominal growth on the basis of structural reforms is unsuccessful, then there is a threat of additional haircuts for individual countries, from a long-term perspec-tive, as this has already occurred in Greece and, indirectly, in Cyprus through bank deposits.8

Exhibit 6 shows the debt levels for many of the European countries. Despite austerity efforts, the current trends for some countries are not viable, in our view. This is particularly the case when accounting for each country’s disguised indebtedness as a result of commitments to state pension and health systems, and civil servant retirement pen-sions, which need to be honored in the future.

Balance of PaymentsThe financial crisis has led to a balance of payments crisis in the euro countries, as shown in Exhibit 7. Even though the aggregate balance of payments of the EMU countries has been largely stable for years, the differences in the balance of payments of the individual EMU countries were only sustainable if either the capital account balances, or the banking systems, were able to offset or refinance the deficits of the weaker countries.

During the financial crisis, these mechanisms came to a standstill. In the countries with constant balance of payment deficits like Greece, Spain, and Portugal, heavy outflows occurred in the capital account balance, and, in effect, the countries’ deficits could only be balanced by means of internal transactions within the national central banks of the ECB system (known as the Target II balances). Therefore, the

national central banks of the surplus countries (e.g., Germany and the Netherlands) had to finance the deficits of the southern countries, which is not sustainable in the long term, and ultimately led to the balance-of-payments crisis within the EMU.9

However, the balance of payments is one aspect of the EMU crisis that appears to remain under control as a result of the measures taken in recent years. In the peripheral countries, cuts, reductions, and domes-tic economic collapse have not only substantially reduced imports, but have also increased exports due to an internal devaluation and improved competitiveness within these countries. Thus, the balance of payments for Greece and Portugal are approaching zero, and Spain, Ireland, and Italy are already showing balance-of-payment surpluses. Although capital transactions have not yet returned to normal as a result of persistent bank weakness, this is likely to gradually reduce the problem of Target II balances.

CompetitivenessFrom the EMU’s inception until the outbreak of the financial crisis, Germany’s competitiveness had consistently developed due to the labor unions wage restraint and the Schröder reforms, which started in 2003. In contrast, the southern countries, in particular, have become less competitive due to rising wage costs and growing economic rigid-ity. As a result, the euro zone imbalance continued to grow. Declining competitiveness can translate to a deterioration of the balance of payments and declining growth; this causes debt to rise, the response to which is often a tax increase which, once again, leads to declining competitiveness and so on until a crisis breaks, as the problem has become too big to be ignored.10

Since 2008, competitiveness has significantly increased in many countries as a result of the measures taken during the crisis. Wages and costs have fallen massively, particularly in Ireland, Greece, and Spain. France and Italy can be considered problem cases, where progress is lacking. Nevertheless, as demonstrated in Exhibit 8, the relative

Exhibit 6Government Debt Levels for European Countries as Percentage of GDP

AustriaBelgiumFinland

FranceGermanyGreece

IrelandItalyNetherlands

180

160

140

120

100

80

60

40

201996 2000 2004 2008 2012

(%)

PortugalSpain

As of 7 June 2013

Source: Thomson Reuters Datastream

Exhibit 7Euro Countries Net Balance of Payments as a Percentage of GDP

(%)

-10

-15

-5

0

5

10

2004 201220082000

BelgiumEuro Zone (12)France

GermanyGreeceIreland

ItalyNetherlandsPortugal

Spain

As of 7 June 2013

Source: Thomson Reuters Datastream

6

competitiveness of the euro zone does not appear to be a major con-tributing factor to a disintegration of the euro zone in the short term.

Economic Growth and the Labor MarketIn our view, economic growth and the labor market are at the heart of the euro zone’s problems. For decades, the region has been plagued by weak growth and a steadily weakening labor market. Thus, we believe “Eurosclerosis”, or the ever increasing rigidity of euro zone economies, continues to pose a very real problem.

We believe that the persistence of the most recent recession can be overcome by a reduction in austerity and the continuation of expansive monetary policy. However, there are not any forthcom-ing solutions to structurally return the euro zone to a path of higher growth. As a result of softer economic growth and despite weak popu-lation growth, employment has continued to deteriorate, particularly among younger generations. Exhibit 9 shows real GDP growth for 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 call into question the effectiveness, and thus the legitimacy, of a mon-etary union.

Europe’s steadily declining share of world trade over many years, which is shown in Exhibit 11, can be considered an indicator of economic weakness. We believe this is primarily due to the rise of the emerging markets. However, Europeans seem jaded, as they appear to be unaffected by this dynamic.

In our view, the EMU will only be a successful, long-term monetary union when politicians and individuals are willing to carry out and support the heavy lifting of structural reform, which includes: reforms for the labor markets and pension systems, dismantling bureaucracy with respect to company formation (improve the ease of doing busi-ness), and truly opening all markets. Moreover, high-level growth initiatives across the entire continent, with the objective of overcom-ing the severe neglect of European infrastructure, could be a helpful collateral solution.11

Evaluation and OutlookWe believe the combination of measures that were incorporated after 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 austerity measures taken in recent years, and multiple institutional reforms to set up the EMU, have substantially reduced the short-term tail risk of a disintegration of the euro zone.

In our view, the reforms that were successfully implemented during the crisis are considerable, and far more effective than one may have originally expected from the political sector. Once again, these mea-sures were confirmation that the political system is capable of acting in an acute crisis.

Nevertheless, we believe that one cannot overlook the fact that the decisions made over recent years have a slightly bitter taste. Throughout the crisis, the intense pressure on decision makers led to an extensive lack of communication with the public and an abandon-ment of the democratic process. The “no alternative” argument, by

Exhibit 9Real GDP Growth

2000 2004 2008 2012

-5

0

5

10

-10

15

Change Compared to the Previous Year (%)

AustriaBelgiumEuro Zone

FranceGermanyIreland

ItalyNetherlandsPortugal

Spain

As of 7 June 2013

Source: Thomson Reuters Datastream

Exhibit 10Unemployment Rate

0

(%)

20

15

10

5

0

25

30

2004 201220082000

BelgiumEuro ZoneFrance

GermanyGreeceIreland

Italy NetherlandsPortugal

Spain

As of 7 June 2013

Source: Thomson Reuters Datastream

Exhibit 8Relative Real Competitiveness

802000 2004 2008 2012

90

100

110

120

130

140

ECB Indicator Real CompetitivenessIndex, 1999 = 100 (increase = less competitive)

BelgiumFranceGermany

GreeceIrelandItaly

NetherlandsPortugalSpain

As of 7 June 2013

Source: Thomson Reuters Datastream

7

itself, will not generate any enthusiasm for the euro. The emergence of many protest parties, such as Italy’s Five Star Movement and the Alternative for Germany party (Alternative für Deutschland, or AfD), illustrates how the public has found its political voice in response to its discontent.

In addition, there has often been, in our view, little concern whether politicians’ decisions were consistent with the law. The forced manner in which the no-bailout clause was instituted raises doubts about the political sector’s respect for treaties. Prime examples include the deci-sions regarding the ESM and ECB’s role as a backstop to the crisis, the path toward community liability, and the inter-European transfer union, which were made without open communication from the political sector.

The ECB’s policy of unlimited government bond purchases is essen-tially state financing through the back door—a development that is only effective as a short-term emergency measure.12 This following point should also be clearly stated: The goal of the EMU was to create a community of values and laws, and it becomes problematic when common values are largely ignored once a difficult situation arises.13

A critical analysis shows that we are still a long way from achieving the four main goals of European unification. It is important to recognize that European unification has contributed to a long period of peace in Europe after World War II (excluding the Balkan War in eastern Europe). However, the disputes and recriminations between Germany and the periphery, in connection with reduced rescue packages and the appearance of the Troika, show that the goal of communal values is still a long way off. The cultural differences, the diametrically opposed concepts of the state in different countries, and the tenacity of these differences were clearly underestimated at the start of the EMU.14

It can, at the very least, be disputed whether the goal of containing Germany’s claim to power has been achieved by means of integration during the unification process. During the crisis, Germany has moved into a position of strength and dominance that even the country

itself did not want, as a result of the weakness of the other European countries. In this regard, there is a need for the other countries to reor-ganize by means of structural reforms—only then will all euro zone countries be able to approach one another on equal ground.

In our view, the goal of increasing prosperity through the internal market has fallen far short of its potential. The introduction of the euro did not improve Europe’s weak growth and rising unemploy-ment—rather growth and unemployment have worsened. It is important to note that, the internal market and the unification process alone do not help to accomplish this goal. Such prosperity is only attainable if the internal market arrangement and EMU’s institutional framework are structured in such a manner that the internal market can grow into its potential strength. With the current configuration, this has not been the case.

Finally, we believe the goal of strengthening Europe’s global political standing remains distant. Today, European nations continue to be as divided as ever. The euro zone has been the center of economic adver-sity for some time, so it is not surprising that, at the global level, it appears as if Europeans are not being taken as seriously anymore.

In the end, a mixed conclusion remains. The euro and the EMU will remain intact, because the ECB and ESM provide a strong safeguard. However, as previously stated, the euro currency is not the solution we were promised. Exhibit 12 plots the deutschemark to US dollar exchange rate over the last 50 years, and illustrates how the euro is not as strong as the deutschmark once was. Further, the ECB is not like the Bundesbank, and we believe it will not be the case that the rest of Europe will become like Germany politically, but rather that Germany will become a reflection of Europe.

The tail risks are now limited by the ESM and ECB, and even amid the difficulty of a markedly low interest-rate environment, some investors feel relatively safer with regard to Europe. But due to the discrepancies in the EMU structure and the public political processes, we believe enough unrest remains to create further volatility.

Exhibit 12Deutschemark/US Dollar Exchange Rate

(DEM per USD)

2.0

1.5

1.0

2.5

3.0

3.5

4.0

4.5

1970 1980 1990 2000 20101960

As of 10 June 2013

Notional exchange rate starting in 1999.

Source: Thomson Reuters Datastream

Exhibit 11Share of Global Exports

1995 2000 2005 20102

4

6

8

10

12

22

24

26

28

30

32

34

36

(%) (%)

Euro Zone (RHS)France

GermanyItaly

Netherlands

As of 7 June 2013

Source: Thomson Reuters Datastream

8

Notes1 Klaeren, J. (ed.) “Europäische Union, Informationen zur Politischen Bildung [European Union, Information on Political Education].” New revised edition, 2012.

2 Krämer, Werner. “Griechenland 2010 – ein Kanarienvogel im Minenschacht [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 Begutachtung 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 Crisis – Dynamics and Overcoming].” Presentation at Bergische Universität Wuppertal, October 2012; Franz, W. “Herausforderungen an die Wirtschaftspolitik in Europa [Challenges for 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/sme-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 the Examination of Overall Economic Development, 2011.

11 Sidorov, P. “Euroraum – Wie könnten Wachstumsinitiativen im Detail 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 ECB Is Undoubtedly Moving in a Gray Area].” Handelsblatt, 4 June 2013.

13 Klein, H.H. “Überfordert – Die Europäische Union braucht eine 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].” 2012.

Important InformationPublished 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, and 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 sources 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 subject to change.

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Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. 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.

LR23369

Australia: Issued by Lazard Asset Management Pacific Co., Level 39 Gateway, 1 Macquarie 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 Center, Taepyeongno-1ga, Jung-gu, Seoul, 100-768. United Kingdom: For professional Investors Only. Issued by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Registered 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, NY 10112.