The following is an excerpt from our research piece Europe - Why it Matters, the Problems, and the Potential Solutions which can be found at pathlightinvestors.com/europe-why-it-matters-problems-and-potential-solutions
One of the worst feelings a human being can experience is uncertainty. We like to know how things will play out, to have confidence that decisions we make will be rewarded, and to know that we are “on the right path.” Equity markets are exactly like human beings. They hate uncertainty. Uncertainty dashes hope, and at the end of the day, stock markets are as much a gauge of hope as they are of true value.
This is why the European crisis is such a paralyzing “event”. Even though we would rather not believe that the debt problems of a country with a population the size of Manhattan (Greece) can/should affect the U.S. economy, the simple fact is that we cannot ignore what is playing out in Europe. More importantly, if we don’t learn from these issues, we can expect greater pain in the future.
Why Does Europe Matter?
Just as a refresher, the European Union is made up of 17 member states that have formed an economic and monetary union allowing for easier trade between member nations and a more integrated financial system. The belief was that after a sordid history of constant war/conflict, economic integration would lead to stability and the fostering of common economic interest.
Inclusion in the European Union was supposed to be based on strict fiscal and economic parameters (deficit to Gross Domestic Product (GDP) under 3% and debt to GDP under 60%), but the fiscal controls that “rule” the Union were never given any teeth. Therefore penalties for violating things like excessive budget deficits are essentially nonexistent.