It’s on like Donkey Kong. Italy’s technocratic Prime Minister Mario Monti came up with the biggest and best Freudian slip of the Euro crisis so far:
‘If the governments are tied by their parliaments’ decisions, the lack of freedom of action will result in Europe’s breakdown, rather than deeper integration…’
Who needs democracy when you can have deeper integration? With people like Mario!
The German reply was very snarky:
‘We must make it clear to Mr. Monti that we Germans will not shut down our democracy to pay Italian debts.’
Europe’s economic woes are beginning to resemble a failed marriage. Even the ex-PM, the philandering Berlusconi, has reappeared on the Italian political scene. Financial trouble is a leading source of relationship breakdowns. But now things have gone one step further, with petty arguments and name calling.
In Germany, they’re thinking long and hard about what they’ve gotten themselves into. The political leadership is supposedly considering a euro referendum. Meanwhile, the Italians and Greeks are letting the Nazi Germany references flow at a steady pace.
Italian/German Relations…
It won’t be long before this ends badly. For Europe, at the very least. But the European Union is the world’s largest economy. When the bad news breaks that the world’s largest economy is set to extend its suffering, that’s not going to be great news for the rest of the world either.
Europe’s Mistake from the Beginning
Worst of all, the Europeans didn’t insist on a pre-nup when they got married. They got a lot right, like a long engagement period in the 90s. The years of stability fooled the countries into a wedding and moving in together. But now things are looking dicey. That shows why it’s always a good idea to have a plan B. Without a pre-nup, nobody knows who gets what. Now we’re almost definitely in for a bitter break up.
The good news is that at some point or other, there’s going to be a garage sale. European assets will be up for a bargain as the European Union unravels and the divorcees go their own ways. If you’re looking to put your money to work, that could be an opportunity in the making. So what assets should bargain hunters keep a keen eye out for?
On Friday, Money Morning featured two of the new up and coming housing bubbles. Unless you want to move to Europe on some sort of extended holiday, it’s probably a bad idea to buy an actual house. And based on some quick research we did a few months ago, there aren’t many ways to buy into the German property market via the stock market, either.
Germany is one of the countries in Europe which missed out on a housing bubble in the 2000s, but is inflating one now with the ECB’s near zero interest rate policy (ZIRP). It would’ve been a great trade to invest in German property if Germany did have some sort of Real Estate Investment Trust (REIT) sector.
So what sort of assets should bargain hunters have their eyes on in Europe?
The first thing to do is think about each nation’s ‘domestic currency’…
Sounds stupid, because so much of Europe uses the euro. But if countries begin leaving the common currency, some of the new currencies will rally significantly. Economically strong countries will see their currency rise and vice versa. In other words, you want to invest in assets that will be denominated in deutschmark, not drachma.
Then again, the euro might hold together. For better or for worse. That would disadvantage countries which need to revalue their currency downward, but can’t because they’re stuck in the currency union.
It would advantage countries that should have a higher currency and interest rate, but don’t because they are dragging the laggards along with them. Once again, countries like Germany benefit from loose monetary policy and a weak currency. They get to finance debt cheaply and export at favourable prices. A basket of famed German exporters could pay off nicely.
Keep in mind though that an artificially low currency and interest rates are only good in the short term. Anyone investing in Germany should remember that it’s going to experience a bubble, not some sort of sustainable economic boom. And bubbles pop…eventually. There are plenty of gains to be made in the meantime though.
Bargain Hunting in Europe
If bubble investing doesn’t phase you, there might be some interesting bargains for investors already. And if you’re worried about the idea of investing in a foreign stock market, say because of the language or the costs of diversification, you could use an ETF or index fund.
Looking outside the euro, we’ve got the UK as a seemingly obvious opportunity to buy depressed assets. But Britain has vast amounts of private debt in addition to its public debt. The reality of both is yet to hit. If the Brits try to inflate their way out of trouble, that will take its toll on the pound.
A fall in the pound would reduce returns for Australian investors in Britain. Then again, Britain might go on a growth spurt if it escapes the clutches of the European Union. Currently, a huge proportion of British laws are made in Brussels. That doesn’t go down well in the electorate, or the economy.
Scandinavia looks promising for investors looking for something safe. The famous financial crisis predictor, Peter Schiff, has long been a fan. Part of the reason is that the Scandinavians went through in the 1990s what Europe is going through now. They cleaned up their act back then. And now, they look comparatively prudent.
So when should you start buying up bits of Europe? Well, many Europeans are about to come back from their summer holidays. And they’ll find their economy in tatters. So buying now may not be the best time. But with the European economy in a big mess, it won’t be long before bargains appear.
Nick Hubble
Editor, Money Morning
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