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A European Crumble

|Includes: FXE, Vanguard FTSE Europe ETF (VGK)
Ah, Europe, that strange and mystical place, home to great food and culture, but not the greatest economic or political systems.

“…peace, commerce, and honest friendship with all nations, entangling alliances with none.”
 
So said, Thomas Jefferson in his 1801 inaugural. This doctrine rarely was heeded by the Europeans in the 19th Century, and brought us two World Wars in the 20th
Century. It seems like the 21st Century may be disastrous in its own right, not on the battlefield but in the financial markets.
 
The rosy idea of a grand economic block that could challenge the U.S. has always been somewhat of a fantasyland science experiment in my opinion. Europe is culturally, economically, and historically very diverse. Countries like Portugal, Ireland, Italy, Greece, and Spain (known as the “P.I.G.S”) have economically lagged their British and German counterparts for decades. At no time since the EU’s founding will this be more harmful than over the next few years.
 
How can an entire continent maintain a single economic policy, when they are so very different? Are the German people going to stomach a bailout of Greece or Italy and their trillion in debt? I highly doubt it.
“The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece,” so said Jürgen Stark, a European Central Bank executive board member. “The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances," said Ewald Nowotny, a member of the ECB's Governing Council.
At some point the ECB will begin to raise rates. This is going to leave some countries standing in the weeds. Said Jordi Gali, head of the Barcelona Center for Research in International Economics-

“If inflation picks up in France and Germany, the smaller economies will be left behind in stagnation and deflation. Such an asymmetric recovery is pretty likely. And if the ECB raises rates, it could get very ugly.”
Will the ECB stand by and let one of these countries spend their way into financial ruin? It is not unrealistic to think Greece or Spain could descend into anarchy in such a case. These two countries don’t exactly have the greatest track record in political stability.

What this means for the average investor is simple. The EU is going to fall apart; it is just a matter of time. It could be next year or next decade, it is really hard to say. As long as there remains one economic policy for all EU states, they are in a heap of trouble. Let’s keep an eye out for rate hikes from the ECB. The next one just might be the turning point for the greenback/Euro relationship.