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Europe as an Investment Opportunity


The Compelling Story Behind Europe
As Intel co-founder Andy Grove wrote in his book Only the Paranoid Survive, there are certain events which result in a "strategic inflection point" after which nothing is ever the same. While paranoia may be an extreme response to an economic threat from Europe, investors would be similarly misguided to ignore what is happening there - and happening in a BIG way.

Yes, there are plenty of concerns about Europe’s current financial crisis which are elaborated upon below for the skeptics. One great question is whether the crisis is current or portends to an inevitable decline of the Euro and the European Union. Another is whether Europe, with it’s conflicted national identities can resolve the differences better than our politicians have been able to do with the extreme polarity between the governing parties.

Two books elaborated on the economic potential across the pond in new Europe. The first is “The United States of Europe” by Washington Post correspondent T.R. Reid. The other is “The European Dream” by Jeremy Rifkin. Both are illuminating and highlight many reasons for concern about our economic future and the perception of invincibility most Americans embrace. These books do not predict an end to America as a major player in the world economy nor do they suggest we will fall from our pedestal as did the Roman or British Empires of past. They do, however, suggest several reasons why the U.S. may have to share the economic stage with others and shed some of the "unilateral" attitude many around the globe have come to resent.

Europe - The Basics
The Europe Union (EU) now has 28 member nations with a population base of 455 million and an $11 trillion dollar economy. In other words, the EU has a larger population and economy than the U.S. That, in and of itself, is reason to pay attention. While Europe doesn't represent a military threat, the next battle for world domination may be fought on the economic and philosophical battle field as well as the military one.

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The U.S. dollar has hit historic lows relative to the value of the Europe's currency (the euro). This is a real concern as it affects our purchasing power around the world. It also limits our ability to attract international investments in our economy as well as the loans we have relied upon to finance our spiraling budget deficit - these loans have been in the form of foreign governments buying our U.S. Treasury bonds. It is amusing, in a disturbing way, that individuals like Alan Greenspan and Henry Kissinger are both on record has having projected that the euro would never work. Apparently, they were wrong - enormously so.

The collective power of the 28 member nation union, despite the recent rejection of the European Constitution by France and Holland, may be just the kind of "strategic inflection point" Andy Grove wrote about in terms of changing the dynamics of global economic parity. While the EU doesn't have physical territories or the ability to tax or police its citizenry, it does have an executive and legislative form of government which can override the laws of its member nations. The perceived imperialistic and bullying attitude of unilateral U.S. foreign policies has resulted in a large portion of the population that consider themselves European more than citizens of a particular country - and opposed to U.S. policy regardless of the merits of such a policy.

And because the EU provides almost 3 times as much foreign aid as the U.S. to world's poorest nations, they have considerably more pull in the international community and United Nations. More importantly, they are very willing to let the U.S. spend money and resources policing the world while they spend their money in other ways they consider more important.

What Europe Has that the U.S. Doesn't
For starters, the EU and the U.S. define quality of life differently. While gross domestic product (GDP) is lower in the EU countries, many in the population work less than 35 hours per week and take 10-12 weeks off every year to visit with friends and family or to travel and learn about the rest of the world through experience, not rhetoric.

The Economist Intelligence Unit recently conducted a "happiness" survey comparing 111 countries for relative happiness and ranked Ireland as number 1 (I know what you're thinking but it's more than their whiskey). The U.S. ranked 13th. Unlike many studies which base their results on whether respondents say they are happy, the Economist Intelligence Unit developed a complex formula to objectively rate happiness. The components used to determine the ranking were income, health, unemployment, political stability, job security, gender equality and "freedom, family and community life." Ireland won because, "although rising incomes and expanded individual choices are highly valued ... Ireland combines the most desirable elements of the new (4th highest GDP per person, low unemployment, political liberties) with the preservation of certain cozy elements of the old such as stable family and community life." While it's easy to dismiss such studies, those that do so are often the same ones who rely on similar rankings when selecting a toaster for the kitchen or a college for their children.

Despite spending more on healthcare per person than the EU, the U.S. has a higher infant mortality rate and shorter life expectancy. Ironically, there are over 40 million Americans lacking health insurance coverage while not one European fails to qualify for some form of healthcare provided by the state. And while wages are typically higher in Europe, companies have reduced costs in other areas (like healthcare) which are paid for by the government.

Children in the EU are also better educated when compared with the U.S. which ranks 9th in scientific literacy, 9th in reading and 13th in math.

And worse still, the U.S. ranks 22nd out of 23 among the world's industrialized nations in terms of the percentage of people living in poverty. Only Mexico rates worse.

Business and Investing
While Americans like to brag about productivity, many believe it is due to wasteful or meaningless activity like suburban sprawl, diet and celebrity crazes and the fast food industry as well as the unending spending on the military, law enforcement and healthcare. It is worth noting that the U.S. has an ever increasing prison population (requiring the building of more prisons and the hiring of more guards and bureaucrats) while the EU has much less crime, violent or otherwise.

For all the chest beating in America about economic superiority, the EU has already surpassed the U.S. in several industries including wireless technology, grid computing and the insurance industry.

Risks from the Current European Crisis
As bad as the economy has been in the U.S., the smoldering global center of the economic crisis is Europe. Volatile continental markets and angry demonstrations from Athens to Madrid are manifestations of the desperate scramble by European politicians to contain the Euro-Zone debt crisis that threatens to unravel the single currency and destabilize the region. The European Union and the Euro Zone were supposed to bring about economic stability and remove traditional barriers to growth, such as tariffs and regulations. Instead it's become a selfish union in which flailing economies feed rising nationalism, angst over immigration and simmering distrust between rich and less affluent countries. Many of Europe’s problems have been exacerbated by the inability, or the unwillingness, of policymakers ... to address the debt issues.

While the crisis may seem to be Europe's problem, if it results in a breakup of the Euro Zone or even a growth-dampening series of costly bailouts, it will reverberate from Beijing to Boston and back. Europe is the largest trading partner of both the U.S. and China. It's home to one of the world's largest pools of wealthy consumers. If they stop buying our stuff, everyone suffers. Meanwhile, a dramatic depreciation of the Euro or the possible dissolution of the union would make nations from Asia to Latin America that hold the Euro as a reserve currency much weaker. Even the mere effort to contain the crisis with looser monetary policy on either side of the Atlantic creates a risk of inflation and hot money that could punish emerging markets.

The worries have now come to a head. Borrowing costs for Europe's weaker economies, like Greece, Ireland, Portugal, Spain and Italy, have skyrocketed as halfhearted measures to stabilize markets have made investors suddenly wary that the European center is not going to hold and that richer countries like Germany simply aren't committed to the monetary union.

It's a very different era than the historically exceptional period of rapid global growth from 1991 to 2008, the period in which the European Union, the Euro and the dream of greater European integration were born. The linchpin of this age of optimism was, of course, the U.S. It helped rebuild Europe after World War II and toppled its main ideological competitor, the Soviet Union. The dollar and U.S. government debt, backed by America's well-functioning democracy and strong growth prospects, remained the largest, most liquid and (seemingly) safest investments on the planet. It was in this environment, in which all boats were rising, that the Euro began to gain strength.

Needless to say, the global picture has changed. It is a measure not only of the long tail of America's special position in the global economy but also of just how bad things are in Europe and elsewhere that there hasn't been a rush out of U.S. Treasuries. Following the S&P downgrade, ascribed to our slower growth and debt-ceiling shenanigans, investors piled into Treasuries as the market tanked. China, the largest foreign holder of T-bills, issued a stern warning to the U.S. to "cure its addiction to debt." But central bankers from Beijing aren't breaking down doors in Frankfurt to convert their dollar holdings to Euros. The Euro is the only viable alternative to the dollar as a global reserve currency. The British pound is history, and emerging-market currencies are still too small, volatile and controlled. And while plenty of investors are fleeing into gold, the world gold market isn't big enough to accommodate serious dollar diversification without massive inflation in gold itself. Prices are already at record levels.

After all, the average Euro-Zone deficit is only 6% of GDP, compared with 10.6% in the U.S., and Europe's debt-to-GDP ratio, while similar to America's, isn't rising as fast. The difference is that the U.S. has time and favorable borrowing rates on its side; Europe has neither. Also, the U.S. can tackle its fiscal problems if it finds the will to rise above partisan politics; the politics of the E.U. — and in particular its lack of true political integration — makes it impossible for it to actually get to the root of the Euro crisis.

The result is a monetary union that can sometimes resemble a casino. The existence of a European Central Bank (ECB) means that countries like Greece, Belgium and Ireland are free to borrow from the credit window and take on more debt than they can handle. But the fact that there's no centralized political control or accountability means that more-prudent member countries like Germany have no way to stop weaker states from undermining the viability of their shared currency.

That's not so easy on a continent with a currency and a monetary system underpinned by multiple political systems, economies and fiscal priorities. Figuring out how to bail out the Euro Zone is a lot tougher than figuring out how to bail out the U.S. financial system, although throwing money at the problem is a certainty.

There is a way out. Germany, one of the strongest and most solvent economies not only in Europe but in the rich world, could swoop in and save the day by leading an effort to guarantee all Spanish and Italian debt as well as the debt of the major European banks. This would calm markets. But it would be hugely expensive, not to mention politically contentious. There is a way out. Germany, one of the strongest and most solvent economies not only in Europe but in the rich world, could swoop in and save the day by leading an effort to guarantee all Spanish and Italian debt as well as the debt of the major European banks. This would calm markets. But it would be hugely expensive, not to mention politically contentious.

Bailing out Europe would represent a huge economic and political cost. Assuming it became politically acceptable, Germany would need to be able to make sure that Portugal, Italy, Greece and Spain — and any other European "PIGS" — cleaned up their act. And that, in turn, would require a real political union in Europe, one in which Brussels, the Euro capital, and perhaps to a disproportionate extent Berlin had control of the purse strings and fiscal policies of the Euro Zone.

The turmoil is a portent for the U.S. We are ultimately facing the same problem as old Europe: how to grow amid a continuing downturn when the public sector can't or won't spend more to jump-start the economy. It's clear that we've still got a lot of work to do before that problem is solved.

It Ain't Over Until It's Over
As the famed New York Yankees catcher and manager Yogi Berra used to say, "it ain't over until it's over." Or as Abraham Lincoln was fond of saying, "keep your friends close and your enemies closer." The U.S. has been very close to their enemies (remember the "axis of evil" philosophy and Iraq) but perhaps, and only perhaps, it has taken its eye off the ball (or one of the balls) by not keeping its EU friends close enough.

The U.S. still reigns supreme and will likely, despite the undeniable surge of competition from the EU, be a significant player into the foreseeable future. Still, it is worth paying attention to what is happening in Europe and considering the investment possibilities there as well.

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Whatever your investment needs, Shoreline Wealth and Investment Management can assist you in obtaining the best investment management and services available.

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This page (formatted for versions 10.0 and higher of Internet Explorer) is updated regularly so check in from time-to-time to see new articles and updates. You can click on any underlined words on each page to see a specific wealth management topic in the left margin of each page.

Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

The information contained in this web site is neither an offer nor solicitation of any security or service.


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