Observations on Trouble in the EU
::sigh:: Where to begin? I couldn’t do much aside from roll my eyes as I read a summary of the day’s market activity from the New York Times. For those of you not interested on the whole story, the main point is this:
The euro fell sharply on Tuesday and major indexes in Europe and the United States tumbled as the sovereign debt crisis in Europe and the risk of contagion continued to hang over the market.
Now, the fact of the matter is that even though Germany’s delays substantially increased the amount of money needed for Greece’s bailout, the bailout has gone through. Greek workers are protesting because of the austerity measures the aid package forces on the government, although the real truth is that their economy would be hit far harder if the government had defaulted on it’s debt. While Greece remains a worry because of the possibility that continued strikes would substantially undermine stability in the country, it’s too early to tell yet what effect the bailout will have.
I don’t think worrying over the situation in Greece is silly. It’s a very serious situation that will take much work to make right. However, I think the markets’ and media’s obsession on Spain and Portugal is a bit of a waste of time. Although both countries had their debt downgraded by ratings agencies last week, the fact of the matter is that both are several steps above Greece’s debt in status. Spain especially, is in a better place than Greece. While it’s worth keeping an eye on their situations, the dire proclamations of their downgrade are becoming rather tired.
My main problem is with the flightiness of investors and their frankly incredible ability to generalize. By generalize, I mean that investors, when worried or in a panic, don’t distinguish between good and bad economies. That was proved well enough by the Asian crisis, when strong and weak economies alike found investors fleeing after conditions in a few countries deteriorated. This behavior on the part of investors takes what could be a localized crisis, and spreads it over large areas.
That is the risk to the EU presently. The euro fell against the dollar again, closing at $1.3019, after dipping below $1.30 at one point during trading. In short, investor behavior risks creating a self-fulfilling prophecy. If investors stand strong against uncertainty, and keep their money in the EU, the zone in general would be stabilized and better equipped to deal with any potential problems that emerge in individual member states. If investors flee from the EU, sovereign debt crises will manifest because government incomes would plummet while their debt levels remained the same.
Not all investors are susceptible to panic. I was happy to find that all the funds I’ve invested in through my 401(k) and IRA made modest gains even as the Dow fell 225 points. It may have been because rather than obsessing over the EU, the fund managers were paying attention to the good news released today:
The European debt crisis dominated Wall Street. Traders paid little attention to the latest economic reports, which both topped expectations. The Commerce Department said that orders to factories rose 1.3 percent in March, and the National Association of Realtors said its index of sales agreements for previously occupied homes rose a stronger-than-expected 5.3 percent in March.
The point is, it is imperative that investors stay grounded in reality. Before panicking over bad news, make an honest assessment of your risk. If you are not substantially exposed to the problem at hand, what point is there to become worried? And if you are affected by the problem, do not act in panic. Put all options on the table and make the best decision to minimize your risk. Rash actions can undermine growth and stability, and at the current time, we need growth and stability far more than self-fulfilling prophecies of disaster.
*Photograph by Wikipedia User AgnosticPreachersKid
