Another Dangerous Year Ahead for Europe's Investors
THE investment outlook in 2012 depends very largely upon Europe. If the euro fragments, there would almost certainly be a depression in Europe and recession in the wider world. If a practical way forward is agreed that convinces bond investors that they can safely lend to European governments in euros, there is the potential for a sharp rise in the price of risk assets, which would be driven partly by the deployment of investment funds currently frozen by uncertainty.
The plan outlined by the EU Summit last week ticks some important boxes. It proposes innovative routes to increase capital buffers (using the International Monetary Fund) and commits to apply penalties for fiscal misbehaviour in a new intergovernmental agreement between most of the members of the EU. However, details are conspicuous by their absence, including an understanding of the European Central Bank's (ECB's) role as lender of last Email your email@example.com write PO Box resort.
Hall Liverpool L69 3EB The net result is that, although steps forward have been taken, we are still some way from diffusing the tension currently paralysing the European banking sector and investors. Chancellor Merkel has recently done a good job in emphasising that there is no magic solution (the ECB buying everyone out of their difficulties), signalling that stabilisation will take time.
Looking at the situation through German eyes, it is logical to retain the "big stick" of an implied threat to leave an intransigent debtor nation to the mercy of the markets while they have yet to fully implement a more sustainable budgetary direction.
with at For us as investors, however, we must recognise that a decision has been taken that it is worth paying the price for a structural re-engineering of the euro after a Teutonic model, namely a prolonged recession caused by fiscal austerity compounded by accelerated deleveraging of the European banking system. …