Eurozone Collapse-Talk

 

Written by Senior Planner, J. Bradford Flecke, JD, CFP®  (based on an article by Bob Veres)

Recently collapse-talk has moved from the back alleys of the investor community to Main Street.  Collapse of the US dollar, fiat currencies generally, the US economy, the Chinese economy, world trade, real estate, credit markets, precious metals prices, Grandma’s angel food cake, and everything else good in the world is in danger of collapsing—or at least that is the talk. 

Collapse.  Crash.  Breakdown.  These are emotion-laden words.  They may instill fear, panic, resignation, or other negative emotions. However, investors ought to be wary of emotional words.  As a lawyer, I learned to mistrust words many years ago (as a financial planner, I have learned to mistrust numbers as well, but that is a subject for another article). 

For investors, there is great value in being able to a) identify emotional words and b) mentally swap them for emotion-neutral ones. 

  • Question: what are “collapse”, “crash”, and “breakdown” really?
  • Answer: These words connote an end, an undesirable end to be sure, but not an end in an absolute sense.  These words connote an end from the perspective of one who has skin in the game and stands to lose.  A more emotion-neutral term than collapse might be restructuring. 

Today, the Eurozone, the economic and monetary union of European nations, is in danger of collapsing.  That theme is all over the financial news.  The thought inspires fear and panic. If you’ve been paying close attention, you might have noticed that the U.S. and global investment markets have been bouncing around unpredictably from one day to the next, and every time there is a major move, you hear analysts mumbling something about the debt crisis in Europe. On the up days, they talk about light at the end of the tunnel. On the down days, they talk about the possible collapse of the Euro as a currency, or the breakup of the European Union.

The assumption seems to be that if Europe were to devolve back into multiple currencies, there would be dire consequences for the global economy–and your stock portfolio. Or, if the various bailout measures work, people seem to assume that the world will enjoy economic sunshine.

A recent analysis by Stratfor Global Intelligence points out something that many people (especially investors) seem to have forgotten: that Europe’s individual countries were the world’s leading economic powers for centuries without the convenience of a common currency, and often while they were engaged in fierce wars with each other.  

If the worst case were to play out and several PIIGs opt out of the Eurozone and deal with creditors on their own terms, and the Eurozone swiftly fades into history, what then?  Stratfor’s conclusion is that Europe will remain an prosperous place with or without a European Union.

If Greece or any other nation were to secede from the Eurozone, it might actually relieve the pressure that the world is experiencing now.  Greece would be able to print drachmas once again—and run the drachma printing press 24/7 to pay government debts less painfully, less painfully for the Greek government.  The pain of drachma inflation would be felt by European banks holding Greek bonds and by Greek consumers who fiercely oppose paying higher taxes in order to pay off foreign creditors—but the inflation would not be a European inflation, at least not directly.  In this way, Greek secession might be a more workable solution to the Greek debt problem than either an outright default by Greece or getting German taxpayers to bail out the Greeks one more time.

If our worst fears are realized and the Eurozone collapses (restructures), and the consequences are not nearly as bad as everyone seemed to imagine, you might see many investors returning to the market to buy the stocks they unloaded when they thought the world was going to end.

So much for collapse.

Restructuring.

Beware of emotional words.

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