According to news sources, Moody’s is about to downgrade Spain’s debt rating, again. Greece is still struggling with austerity measures imposed by the EU in return for bailout funds. The Euro Zone appears to be poised for another recession. Does this mean the end of Euro Zone austerity? The issue in Spain is the same as throughout the continent. Both banks and nations are in trouble. At this point virtually the only lenders willing to support national debts are banks in the various nations in trouble. The fact that Moody’s is downgrading Spanish and other banks as well as national debt ratings spells this out. The issue for investors is what the future will bring. Will the EU continue to insist upon austerity at the cost of recession? Or, will the EU aim for economic stimulus and job growth. For the long term investor now could be the time to invest in a Euro Zone recovery at low cost.
The World’s Largest Economy
When the Euro Zone is not struggling with monumental debts it is the world’s largest economy, or second, depending upon how the USA is doing. The EU has a skilled labor force and, as a result of its current problems, a place to invest and do business at a somewhat lower cost. The current debt problems are a headache for China as the EU has been its largest customer. A reinvigorated EU might just find itself selling more to China, buying less, and growing its currency reserves again. This could be the end result of an end of Euro Zone austerity. Part of the puzzle for renewed EU growth is duplication of the strategy currently followed by the USA. The US Federal Reserve buys US treasuries and does so with printed money. This has kept interest rates low and helped maintain a slow recovery. It also promises to make the US dollar less valuable over time. If both the USA and EU do this they will end up with cheaper and more competitive currencies. In the case of the USA following the Bernanke Doctrine and an end of Euro Zone austerity measures the world’s two largest economies may see their exports rise along with employment numbers. Companies in Europe and the USA may well be where investors will be picking new winners as the debt crisis rights itself.
Fundamentals, Fundamentals, Fundamentals
If indeed Europe gets its act together, decides on the end of Euro Zone austerity in favor of growth, smart investors will use fundamental analysis in order to pick profitable stocks. Although a rising market tends to lift all stocks there will be companies that are better positioned to take advantage of a cheaper Euro and a recovery of global markets. There will also be companies better able to compete within the Euro Zone itself. If things come together in the EU in the next months or years anyone holding today’s bonds which are at historically high rates will prosper as well. All of this having been said please consider this article food for thought. If you believe that we will see the end of Euro Zone austerity and an economic recovery only invest in stocks and bonds that you understand on for which you have done your own fundamental analysis.