Why Europe's Crisis is Everyone's Problem
Why Europe’s Crisis is Everyone’s Problem
Ron DeLegge, Editor
September 9, 2011
Europe’s financial crisis has escalated from a regional problem into a global one. Banking and financial institutions in the region are at grave risk because of their exposure to toxic sovereign debt. In turn, investors around the world are at risk because of their exposure to Europe’s financial system.
How big are Europe’s problems? What will be the global effects? And what’s the proper investment strategy for dealing with it?
A Global Problem
It’s hard to downplay the severity of Europe’s (NYSEArca: EZU) troubles. The region accounts for approximately 20% of global GDP. Close to 700 million people in Europe and elsewhere use the euro currency and any disruption in the flow of money would be catastrophic.
For these reasons and more, the EU and IMF in June 2010 setup a $1 trillion bailout fund to rescue any EMU member at risk for defaulting on its debt. Its purpose was to help bridge financing needs for troubled countries and to calm the financial markets. It may have worked for a while, but not anymore. Europe faces too much debt along with an aging population, over regulation of non-financial enterprises and lingering doubts about the credibility of the EMU.
Cracks in the “Union”
When commencement of the euro (NYSEArca: FXE) was first introduced on January 1, 1999, the goal was to have a united association of countries harmoniously working toward the goal of mutual economic prosperity. But the theory that there’s power in numbers is a double-edged sword.
In our mid-August analysis, which was published for our ETF subscribers, here’s what we stated: “Europe’s (NYSEArca: VGK) crisis is the same story it’s always been – financial contagion. Clear evidence is Germany’s disappointing second quarter GDP figures of just 0.1%, which badly missed expectations of 0.5% growth. As the Union’s strongest economic member, Germany is experiencing decelerating growth because of the region’s crisis. Also, its association with weak members is making itself weak. The myth of "there's power in numbers" never looked so wrong.”
The dissension among “union” is becoming louder and a divorce is inevitable. The latest evidence is Germany (NYSEArca: EWG), which has essentially protested further financial aid to Greece unless it can prove that it’s fulfilling its end of the bailout deal. The message is clear: The era of blank check bailouts are over. It didn’t work in the United States and it’s not going to work in Europe. Furthermore, Greece’s default is simply a matter of when, not if. The credit market already knows this.
Investing and Trading Strategies
Blindly investing in European securities and hoping for the best is not a smart investment strategy. We’ve warned our subscribers about the imminent danger of investing in financial products backed by the faith and credit of European banks. Yet, some $16 billion of dumb money remains invested in these products. (See our 8-24-11 ETF Weekly Pick)
As an alternative to the conventional wisdom that the worst is over, ETFguide has recommended investing in “quality assets.” What are the “quality assets” and which ETFs follow them? And how can you profit in this bear market environment? The ETFguide Profit Strategy ETF Newsletter and its Weekly ETF Picks spell out which are the quality assets to stick with. Also, warnings about the imminent dangerous in a certain type of exchange-traded products have been sounded.
It wasn’t that long ago when financial experts were predicting the euro was ready to supplant the U.S. dollar as the world’s reserve currency. All along, we knew they were wrong. And unfortunately, Europe’s crisis has escalated from regional contagion into global contagion.
Greece is just the tip of Europe’s financial problems and not far behind is Spain (NYSEArca: EWP) and Italy (NYSEArca: EWI). Unfortunately, things will probably get worse before they get better. Time to hunker down!