U.S. Investors woke to heavy selling led by European markets as questions surrounding the very existence of the European Union rose yet again. The fate of the noble EU experiment could effectively be decided as soon as this week when the German Constitutional Court votes to determine if it's constitutional for the ECB to buy the debt of foreign nations. If Germany refuses to participate in an expansion of the ECB's balance sheet, none of the other nations have the wherewithal to chip into the kitty, if you will. Given that the German economy is even closer to an official recession than the U.S., it seems a long-shot that German citizens will opt to send more money abroad.
I asked Rod Smyth, Chief Investment Strategist at Riverfront Investment Group to help piece together exactly what's going on in Europe. Suffice it say, it's not great. The German Constitutional Court's "vote could not be coming at a worse time," noted Smyth. "What you need in Europe is exactly what the Federal Reserve did in 2008; you need a lot of money to secure a lot of bonds."
Whatever you think of the Fed's TARP program, it wasn't much of a problem getting it enacted. There's one US central bank - the Federal Reserve- whose power is recognized by 50 states. The ECB represents 17 different countries bound only by a series of treaties. Seceding from the European Union is a decision Germany can and will make, should their citizenry balk at picking up even more of the ECB's tab.
"It's a very tenuous situation," said Smyth, one he is loathe to handicap (at least verbally). In terms of voting with his investment feet, Smyth said he's "as underweight in Europe as we've ever been." He thinks a European recession is in the cards regardless of Germany's and France's actions; it's just a matter of the depth and whether or not European nations go into the downturn together or individually.
I've said it before and will no doubt say it again: The EU's death is fast upon us and will seem obvious in retrospect. What that means for European, global economies, and stocks is just about anyone's guess.
- German Constitutional Court