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MAKING CENTS OUT OF THE NEWS
Blog #03
(January 19th, 2012)
Is Europe’s Economic Crisis Our Problem?
By Tom McAllister, CFP®
The U.S. stock market remains extremely sensitive to what is going on in the Euro zone, essentially Western Europe. This past weekend, for example, many countries in Europe saw their debt downgraded by Standard and Poor’s. It seems there is no easy solution to these problems, especially when it comes to Greece. This fairly small country is having an exceptionally large impact on markets around the world, based on the fear that Greece’s going broke will trigger a similar effect in the rest of European countries.
Americans tend to refer to Europe as if it were a group of united states rather than 17 different individual countries, each with its own interests, values, economies, and leadership. Greece’s problems, observers fear, might trigger problems in the “PIIGS” (Portugal , Spain , Italy , Ireland and Iceland). I believe this fear is understandable but unfounded. The Greek experience in becoming a welfare state has been extreme, with politicians’ promises going far beyond the country’s ability to fund them. Still, a Greek default (which I expect), will not automatically spread to other economies with greater strength and resources. (One possible exception is Iceland with its fewer than 200,000 citizens.)
Remember, too, a common currency does not make for a common market. We have no idea how these countries are going to perform, either individually or as a group. We don’t know how well the various debt reduction plans are going to succeed, or how much confidence success might stimulate. Lastly, we have no idea what the policymakers and leaders of these diverse countries are ultimately going to do, or how accurate these moves will prove to be.
So it is not surprising that, as we observe what is happening in Europe, we find little clear guidance about what investments to make; that uncertainly, in turn, does nothing to lend stability to our stock markets.
I believe the Greek problem will be resolved, since bankers in Germany, France, and other countries have agreed to put up enough money to allow them to roll over their debt. I am a lot more concerned about Spain and, especially about Italy, where a new government will be introducing substantial reforms and fiscal tightening. There are sure to be protests from the Italian recipients of the various welfare programs which must be cut back. A great deal depends on how these changes appear to be working in these much larger economies.
The United States has not gone nearly so far down the socialist path as Europe. However, we have a great deal to learn from watching what our cousins in Europe are unable to do. The path Europe has tried to take is a path I hope we can avoid. A great deal rides on the elections in November, less than nine months away. The European crisis is not yet our problem – hopefully it will never be.
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