Europe is no United States
The concept of euro was sold with the slogan: “One Market, One Money.” The argument was made that since a single currency works in the United States, a single currency should work in Europe.
Europe is no United States. In the United States, majority of taxes are paid to the federal government and not to individual states. In Europe, taxes are almost exclusively paid to nation states and not to a central authority.
Most states in the United States have to balance their budgets as a requirement of their constitutions. There are no such requirements in the constitutions of most nation states of Europe.
Current account disparity
The current account is a term in economics that means sum of the balance of trade with adjustments for net factor income and net transfer payments. In simpler terms, it means exports less imports with some adjustments.
At present Germany has $200 billion current account surplus. Rest of the euro zone has $300 billion current account deficit. This disparity is too great for the euro zone to function smoothly.
Live a little
Northern European ethics of hard work and savings are claimed by some to be more rigorous than those of Southern Europeans.
Southern European nations such as Greece took advantage of one currency to live beyond their means.
Irrational investor behavior
It was not that long ago stocks in Europe were flying high. From the time the European stocks were flying high to now, there has only been a marginal increase in sovereign debt. In the aforementioned period, no one can argue that work ethics and spending in Southern Europe have become worse. Yet European stocks are now dramatically lower.
The crisis is positive for investors
The debt crisis is now well known and well understood. This is a positive step compared to the time when European stocks were flying high and debt crisis still existed but it just was not on the forefront
In the process of dealing with the debt crisis, for the first time in decades Europe is coming to grips with the following important factors:
· Aging populations and the resulting negative consequences of state guaranteed pensions.
· Restrictive work rules and immobility of the work force.
· Importance of a thriving private sector.
· Fiscal restraint in government spending.
· Flaws in monetary union without a fiscal union.
Media is full of pronouncements on the future of Europe from 100s of gurus of all colors and stripes. There is no value to be added by my opinion. However, I can state with conviction that Europe is better off today than it was two years ago because now the problems are known, well understood, and solutions in one form or another are inevitable. Further, European stocks are much cheaper today than they have been in a long time. Europe is full of multi-national firms that draw large revenues from growing emerging markets. Even if Europe enters a deep recession, it will still continue to be a big consumer internally and capable of increasing exports.
Most doomsayers ignore the following simple facts:
· Unlike the United States, most of the European debt is owed to Europeans.
· Debt as a percentage of the GDP of Europe is less than debt as a percentage of GDP of the United States when off the books liabilities are taken into account.
Certainly risk is too high to plunge full force into European equities. For those who want to practice buying low and selling high,
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