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May 15, 2015

How Europe Can't Afford A Grexit

By Richard Stavros

The exit of Greece from the European Union (E.U.), which is appearing more likely, could start dominoes falling and lead to a collapse of the union. Given most of our European holdings are global British multinationals, they are somewhat insulated by the short-term impact of a Greek exit, as we noted last week.

But we should consider how investment opportunities on the Continent might change if the E.U. collapses.
Before the European Union was created, pundits did foresee that the cultural differences and extreme nationalism, not to mention deep-seated acrimony between countries as a result of centuries of wars, might overcome a cohesive political and economic union. But they tried anyway, in the hopes that the development of a common identity would reduce the nationalism that had devastated the continent so many times. But now many observers are arguing the grand experiment has failed.
The extreme nationalism the E.U. was designed to eradicate has been on display for months in the negotiations with Greece. And the discussions have degraded to school yard type taunts (the lowest point was Greece demanding Nazi-era reparations, and German ministers dismissing Greek negotiations as a Trojan Horse) even as the economic fate of millions hangs in the balance. Where are the adults, I keep asking myself?
Sure, one can go back and blame bad governments, bad bankers or bad people for the 2008 Financial Crisis, but playing the blame game with 20/20 hindsight doesn’t help anyone.
In fact, what bothers me the most about how European leaders have managed this affair is their moralizing about Greece’s predicament. Greece wasn’t on particularly firm footing when it was hurt by the biggest global economic crisis in the last 100 years that the world is still struggling to recover from.  
Not since the Great Depression have so many in Europe been unemployed or impoverished. With unemployment levels of 20% and 50% or higher for the young in various parts of the E.U., it’s clear that without leadership the future hopes and economic prospects of Europe will darken.  
And this is not an isolated affair. US Treasury Secretary Jacob Lew in late April has warned that global economies could be hurt if European Union negotiations on more financing for Greece fail.
Further, the fact that the E.U can’t seem to fix the problems of one of its smallest members doesn’t inspire much confidence. Can it handle its stagnant growth problem? What if a larger member falls into trouble in the future?  Winston Churchill, among others, said: “The measure of a civilization is how it treats is weakest members.”
If economic progress in the E.U falters, other members might view an exit as preferable to facing endless bureaucratic infighting, character assassinations, recriminations, delays and more delays that Greece has had to face.  
Arguments by E.U. leaders that no other countries will exit the union are flat-out wrong. Italy’s debt stands at 132% of GDP and Portugal’s is at 128% of GDP. If efforts to revive the regions’ economy with stimulus fail, these debt levels could easily become a lot worse and force their exit.  
Even the United Kingdom is mulling over the idea. Re-elected last week, UK Prime Minister David Cameron is drawing up plans to bring forward an in/out referendum on Britain’s membership of the E.U. by next year.
Our Advice
So we have advised investors that want to play Europe to invest in globally diversified British multinationals, as there is some insulation from the volatility and havoc that a potential Greek exit would cause.
In the long term, those countries that exit the Eurozone may prove to be better investments as their currencies will initially (most likely) be weaker than the Euro and as such their products will be more competitive around the world.
While it is our hope that the European Union will be able to resolve its impasse with Greece and enjoy a strong economic recovery, we could well be at the beginning of the end of yet another well-intentioned economic union.  
Courtesy Richard Stavros for Investing Daily (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle
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