European Contagion Fears Come with Reason

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Photo Credit: Reuters

Concerns over a contagion in the nations of Greece and Spain have plenty of support.  However, it isn't debt owners that should be concerned, but the economy of any nation currently using the Euro.

Why the Euro is Weak

The greatest concerns centering on Greece and Spain's debt troubles come from the European Central Bank, an agency tasked with the job of setting monetary policy.  Although central banks play a vital function in the economic climate of any nation, the European economic alliance is being tested by a central bank that cannot work positively for all nations.  Calls for the ECB to begin quantitative easing to absorb the debt woes of two nations have been met with concerns from other developed economies in the region.

An Independent Central Bank

It is of little consequence to Canada or Mexico when the United States begins quantitative easing.  However, for Greece and Spain to be benefactors of quantitative easing, the euro would have to be inflated, and the 22 countries currently using the euro would be negatively affected by any policy changes meant to positively affect the economic conditions in both Greece and Spain.

Don't Bet on Easing

The European central bank is perhaps one of the stingiest of all.  The ECB was one of the last to lower rates ahead of the global financial crisis and has yet to drop its rate it charges consumer banks to nearly the same degree as its western counterparts.

Also affecting the ECB are political ramifications.  The ECB is prohibited by its own mandate to quantitatively ease the credit markets, and individual purchases of Greek and Spanish bonds could risk a political uprising.

However, the debt markets are in crisis, the euro is in free fall, and the IMF’s attempt to bail out the failing Greek economy has yet to show much progress.  Investors should expect further reliance on an international bailout for both nations, though it will do little to solve the problem.  IMF loans are historically ineffective, and they often leave a nation to continue the same destructive policies that set off the crisis in the first place.

If you're looking to invest overseas, avoid Europe as a whole, as every nation, bankrupt or solvent, is prone to the impact of a limited central banking authority.

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