Europe: Financial Crisis or Opportunity?

| November 29, 2011 | 0 Comments

By Rick Brooks

I’m taking a risk with this column, because the rapid pace of change ‘across the pond’ means that everything could be different by the time you read this. Having said that, Europe’s problems are deeply seated, and to put it mildly, far deeper than a ‘mere’ banking crisis.

Today’s European Union, the Eurozone and the Euro common currency arrangement are all products of a concerted effort after World War II, led in part by the United States, to alleviate some of the competition on the continent and more closely join the economic fortunes of the European powers. The hope was that greater interdependence would reduce the likelihood of a repeat of the two devastating wars.

By and large, the project was a success, though many deeply rooted imbalances were glossed over as too difficult to solve. Over time, Europe was rebuilt and their financial systems became more integrated. Trade relationships were rebuilt and blossomed. Having a common currency has facilitated easy trade by reducing transaction costs across borders and made travel much easier. But it also means that governments have fewer policy tools available in times of crisis.

As so often happens in family life, the global financial crisis of 2008 exacerbated some of the deeper imbalances in the European system. For example, there are few economies more efficient than Germany, so it is nearly impossible for Greek or French workers to compete on a level playing field for the same kinds of projects.

At the heart of the European crisis today is an existential dilemma.  Do they prefer to be a united Europe, supported by the strength of the German economy and with the lower costs of a common currency, but losing significant decision making authority to the Germans as the price of their support? Or is it better to split off, rebuild and rebalance the economy but maintain a national identity and sovereignty?

As Californians, where we send more capital to Washington, D. C. than we receive back in Federal spending, we can sympathize with the Germans’ perspective that ‘supporting those lazy Greeks’ is unattractive. But, like the Germans, we benefit immensely from the relationship, too. We receive tourism from the other states, and conduct an awful lot of trade with the other states in the country. Like Germany, there are enormous benefits to our political and economic union with the other United States that are both hard to forget and hard to quantify.

Thus the European crisis will not be easily solved. It requires hard choices from politicians who have not adequately prepared their respective electorates for the decisions (or the costs) which lay ahead. Europe’s problems will likely be worked out given enough time, but there is a significant risk that the challenges facing their banking system could infect our own. A Lehman-like banking crisis in Europe could result in a freeze in our banking system, much as Lehman’s failure caused great stress for European banks.

Yet there are also opportunities, though not for the faint of heart. Fund managers are telling us that many European investments are as cheap as they have ever been. Also, as the Euro comes under pressure, travel to the Continent becomes more attractive for U.S. residents.

Today’s investors need a global approach, because there are now far more investment opportunities outside the U.S. than inside. But the European crisis highlights some of the risks of international investing as well: there are additional factors that can dramatically shape your investment results. For this reason, I still prefer to invest through managed mutual funds with professional management and relatively low cost structures, rather than indexed funds or Exchange Traded Funds (ETFs).

For investors with a cast iron constitution, there may indeed be fantastic opportunities to buy sound investments at bargain prices. Cautious investors may wish to wait for more clarity on the outcome of the crisis. Those who can’t decide may wish to consult a Certified Financial Planner® practitioner for assistance in these interesting times.

This column is prepared by Rick Brooks, CFA, CFP®.  Rick is vice president for Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in comprehensive financial planning and investment management.  Rick can be reached at (858) 755-5166, or by email at Rick and his family live in Mission Hills.



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