Special Report: Europe and the Euro (Part 4)

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Aug 16, 2012 10:52:45 AM

and tagged Europe

Leave a comment

Europe, the Euro, and the Possible Failure of Political Integration

Yesterday, I discussed what success would look like for the eurozone and the European Union. In my opinion, success is a long way away, and in many respects, failure is looking a lot more likely.

For the purposes of this discussion, I will define failure as the rejection of the euro by enough of the participating countries to make its continuance impossible. This definition means that it is not failure if one or several countries leave and the euro continues. In my opinion, Greece will leave sooner rather than later, but that will not result in the failure of the euro. In fact, if Greece or other outlier economies leave, the success of the remainder could become more likely, as the gap that has to be covered by a federal structure would be reduced.

Failure could be the result, however, if Germany were to leave. Germany is the financial and manufacturing linchpin of Europe, and a euro without Germany is pretty pointless. Failure could also result from a French departure. Although France is much weaker economically than Germany, it is still the second largest economy in the eurozone, and it is politically at the center of Europe. Again, a French exit would make the euro pointless.

The case for the remaining large economies—Spain and Italy—is less clear to me. From an economic point of view, a eurozone of the northern, more solvent economies makes a great deal of sense. The northern countries have many of the characteristics outlined above for success, and eliminating the weaker Mediterranean economies would help the eurozone economically and culturally. Politically, however, Spain and Italy are probably as essential as the stronger countries.

Tomorrow, we’ll explore why these countries would stay, the potential consequences to them if they were to leave, and what would cause them to exit.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®