The European political establishment will likely broker a deal
that requiresEurope's stronger economies to act as guarantors for
the weaker economies. In exchange, the countries currently in
turmoil will be expected to implement structural changes to their
economies and enact sound longer-term financial policies. In order
for such a regime to be successful, the EU may need to create a
central authority that will guide these countries toward
implementing these new policies.
The European political process can move at a glacial pace, often
getting sidetracked due to market developments and social forces.
Given such obstacles, the EU may not move quickly with these
reforms until after conditions deteriorate further and the market
forces it to act.
Additionally, equity investors are also contending with the
massive shift of money from stocks to bonds. Although fearful
investors can drive stocks down in the short term, the market's
worst fears rarely materialize and savvy investors use these
opportunities to pick up stocks at bargain prices.
Although I expect the EU will ultimately arrive at a solution to
its debt crisis, it is possible that the political process could
fail. In addition, a full-fledged recession could also be on the
horizon. See Jim Fink's article,
Italy's Debt is Downgraded:The Euro is on the Verge
, for more on the European debt situation. In either case, the
markets could renew their descent.
However, as Benjamin Shepherd uncovers in his article,
Dollars to Deutsche Marks
,Europe does offer low valuations and solid dividend yields. And
from a contrarian standpoint, it's often profitable to invest when
market sentiment is at pessimistic extremes.
Meanwhile,France is in the process of reducing its total deficit
to 5.7 percent of gross domestic product (
) in 2011 from 7.1 percent of GDP in 2010. The country's leadership
also plans to further reduce its deficit to 4.6 percent in 2012 and
3 percent in 2013.
To achieve these deficit reductions,France will reform its tax
code by cutting deductions and eliminating loopholes. French
companies will face an increase in the corporate tax rate, while
wealthy individuals could also face higher tax rates.
At the same time, the government will keep spending cuts modest
to avoid social unrest. But after the 2012 elections are completed,
the French government may make further spending cuts becauseFrance
has one of the highest spending-to-GDP ratios in the eurozone.
Nevertheless,France's economy performed strongly in the first
half of the year, which should allow for full-year GDP growth of a
little less than 2 percent. I expect a similar performance next
Investors should consider going long iShares MSCI France Index
) during periods of weakness. The ETF offers solid growth potential
with its portfolio of resource- and infrastructure-related
companies. The fund boasts a dividend yield of 3.5 percent, a
result of its exposure to pharmaceutical and telecommunications