My Purdue student announced over break she had decided to study abroad in Europe this coming summer.
When this child sets her mind to something, there’s not a whole lot that can stand in her way. Besides, she’s managed to get herself a scholarship, so there’s some money left in her college fund, and I was open to the conversation.
I do, however, find considerable irony that this will be the urchin's second trip “across the pond” while as the Dad, who pays for everything, the extent of my foreign travels is limited to fishing boats in Canada, but that’s another story.
The Europe talk made me realize I hadn’t addressed European economic woes in the column for quite some time. For the better part of a year during 2011 and 2012, this topic was the frontline of financial stress in the world, and now the Eurozone news hardly makes page 2.
Does this mean Europe’s problems are in the past? Are the potential “black swans” under control, and why should we care?
To quickly recap, highly indebted nations of the single currency Eurozone were experiencing rapidly rising, unsustainable interest rates on their sovereign bonds. These high interest rates made the already unsustainable fiscal situations in these nations even more unsustainable and a number (Greece, Spain, Portugal, Italy, Ireland) were feared to be on the verge of defaulting on their bond payments.
This fear of default resulted in a bond selling spiral putting the Eurozone, the euro currency and the whole financial system in Europe on the edge of a Lehman-type catastrophe, which would have been a disaster for all of us.
In mid-2012 the European Central Bank began a number of programs similar to our Fed's Quantitative Easing program designed to inject liquidity to markets. This was to show the financial world no Eurozone country would be allowed to fail and show the world the Euro currency would be vigorously defended. Interest rates stabilized and drama subsided.
Since this time, Europe has limped along in a sort of quasi recession. While fourth quarter 2013 manufacturing and service sector indicators released Wednesday showed some gaining economic strength, unemployment in nations such as France, Greece and Spain remains horrendously high.
Like in the US, European stock markets have responded strongly to the ECB’s liquidity programs with Eurozone market indexes up about 28 percent last year. Unlike the U.S. the Eurozone index remains about 34 percent off its previous highs.
To believe the Eurozone’s difficulties are behind us takes a certain faith in Central bank policy as many of the structural problems that caused the problems in the first place still exist. But for now, the situation appears under control.
As to why we care, the world of course needs a viable Eurozone economy. Investors worried about potential unforeseen market threats will no doubt want to keep an eye on what is happening in Europe as this economy still represents a heightened level of risk.
For investors in search of opportunity, many solid European companies have been thrown out with bath water. If you conclude the Eurozone is likely to endure, then many of these companies are worth a look. For me, I’ll be doing some of both.