Print this article
This year the big story that I’m looking forward to is 'Eurogeddon'. This is the moment when the euro crisis becomes so bleak that the authorities are panicked into an all-out rescue.
That will be the time when I will look to buy back into Europe. If you have a few trades ready, I think you could stand to make some serious returns. I’ve already got a great Portuguese stock lined up (I’ll tell you about that later).
But first, you’ll need to know when to expect Eurogeddon.
To find out, we need to spend a few moments looking at exactly why the euro project was created in the first place. And when you see the real reason behind the euro, you’ll see an epic battle emerging – one that’s set to tear the entire project apart.
The real reason behind the euro project
Why did a group of 17 disparate nations decide that a single currency was such a good idea? Many will say that it was all about cementing peace within Europe. Others will tell you that it’s about opening up trade and increasing competition within the group of nations.
But it’s not the real reason for economic union.
The real reason we saw the birth of the euro is that most of Europe wanted to be like the Germans. Germany has long been admired for its economic governance. And in terms of continental Europe, the nations wanted monetary policy done ‘the German way’.
At heart, that means a strong currency. Give savers a strong and respectable currency and they’ll trust it – they’ll be encouraged to save. And a strong savings base gives you money for investment. Investing in industry delivers productivity gains and new technologies give you that competitive edge. The basic idea: strong currency engenders long-term economic growth.
This is not the Anglo-Saxon way, nor is it the natural way of Europe’s peripheral countries. Here we’ll use whatever policy levers we can to try to manage economic growth for the short term. In the long term, the economy will look after itself. Even if, more often than not, it leads to a weak currency.
These are fundamentally different approaches to running a central bank (and economy). But by the end of the last century, European nations decided it was time for the German approach.
But now that trouble’s brewing, the weaker nations want to revert to form. They want to re-adopt their old ways. And this is putting pressure on the euro.
But the Germans want to stay true to their convictions. Jens Weidmann was installed as president of the Bundesbank last year. He’s a German economist and believes in running a tight ship the German way: no bail-outs and no money-printing.
Claim your free report 'The NEXT major bank collapse?'
Trouble’s coming
I don’t suppose you need me to spell out the problem. But I will...
The economic miracle didn't come to all those nations on the periphery. Did they use the euro’s strong currency status as an impetus to save and invest? Did they heck. They used cheap euro interest rates to go on a borrowing binge instead. And now the strong currency is like a millstone around their collective necks – it’s tough to pay down debt when the economy starts to go backwards.
In short, they want money printing. And when do they want it? Now.
What’s brewing is a battle between economic philosophies.
And it strikes me that for the moment the Germanic approach is winning – that is: pay down your debts the old-fashioned way. This is dangerous, and it could lead to disaster. We’re talking about depression in the peripheral states. In many ways we’re already there: the Greek stock market has fallen some 90% since the 2008 downturn; Greek and Spanish youth unemployment is well over 40%.
The man in the street is getting more and more agitated. Far from cementing a peace within Europe, sticking to the strong euro idea will split it apart.
Germany’s hard line could be very, very bad news for stocks. Public protests, strikes and general austerity are hardly good for business.
What to watch out for
It’s why I’m happy to sit on the sidelines for the moment. What I’m looking for this year is a softening of Germany’s stance. I’m looking for Germany to accede to the Anglo-Saxon way of running an economy.
When will this happen? Right at the bottom.
Only when the situation looks devastatingly bleak will the Germans accede. And when they do, I’ll be looking to buy into some seriously undervalued European stocks.
Of course if no capitulation comes, then we may have to wait five years or so for the depression to pass. In the meantime, nations may well leave the project – there’s no way they’ll be able to take the pain. That’ll open up a whole new world of opportunities too. I’ve already got my eye on Portugal Telecom (PT) – if the worst comes to the worst and Portugal leaves the euro, I expect turmoil in the markets, and I expect to be picking up PT at a serious discount to fair value.
PT has massive exposure to Portugal’s former colonies, and most of its income comes from abroad. These fast growing markets could be a great bet over the coming decade or so.
I haven’t got time to run through all the details now, but I’ll do a full analysis of the company soon and show you why you want to get ready for a bargain.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Important Information
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.
MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. http://www.fsa.gov.uk/register/home.do
Published in
Investment strategies
| More
articles
by
Bengt Saelensminde
Related articles
-
By Luca Serino, May 25, 2012
-
By Paul Hill, May 25, 2012
-
By Paul Hill, May 25, 2012
-
By Phil Oakley, May 25, 2012