Following the latest action by the European Central Bank (ECB), there were early hopes that the eurozone might avoid a financial crisis in the short term. Many investors started moving into Spanish bonds and the debt instruments of other eurozone members, placing large bets on the survival of the union and the euro. It seems that early hopes are fading fast, as Spanish debt is, once again, moving up higher, and exacerbating the problems in the eurozone.
Spain is having massive internal issues, which creates the potential for the financial crisis to become far worse. Just recently, the people and political parties of Catalonia, Spain, have started examining how to legally secede from the country. They want control over their revenue, as that region is an overall net contributor to the country. With unemployment sky-high and the financial crisis close to erupting, this is obviously causing a lot of tension, and local politicians are now using this to their advantage. They’re now using the central government’s weakness and attempting to secede.
As I write this, protesters in the Catalonia region are marching against the government in Madrid. They are calling for independence and sovereignty. The regional government has now called for elections on November 25. The eurozone is having difficulty staying together as a continent; it seems the individual members can’t even agree on how to govern their own countries.
This election is a referendum on the future for Spain and how it will administer its own taxes and assets. The financial crisis in the eurozone is all about integrating different people and nations under one umbrella of an economic union. The funds of one area are used to help those troubled areas in another part of the eurozone in the event of a financial crisis. I think, and rightfully so, that the people in Germany must be asking themselves, if the Spanish people themselves don’t want to bail out their fellow countrymen, why should we?
My question is, if greater integration is the key to keeping the eurozone together, how likely is this to happen when individual countries can’t stay together? I see a tremendous amount of turmoil ahead for the eurozone, and while these latest bailouts might avert a financial crisis over the short term, I think there’s far greater pain ahead.
What this will mean, in addition to more pain for the eurozone, is a flight to quality, or the U.S. dollar and treasuries. I would avoid companies with a lot of risk to Southern Europe as this area is becoming even more unstable. To the many people who believe the U.S. dollar and bond bubble are about to crash, I ask: would you trade American assets for eurozone investments? How about Japanese assets?
In the land of the blind, the one-eyed man is king. Even though the U.S. has a lot of problems, it does appear to have a much lower risk profile than the prevailing choices for large, institutional funds. Also, American corporations are sitting on record levels of cash and have never been so lean. While the economy is not growing at the moment, any improvement would see a massive move in profitability for most U.S. corporations. If the eurozone collapses amid a massive financial crisis, all markets will be hurt—no question. But in such a panic, that’s when one should start buying good companies on sale for long-term investments.