Should I Invest in the EURO?

Should I Invest in the EUROMore than a decade after its much-ballyhooed introduction, the Euro—a currency that started out strong and full of promise—seems dazed and confused: it thinks it’s American…and it thinks it’s 2008.

As the Eurozone finds its southern member-states mired in their own iterations of strangling bank debt, crippling unemployment and looming mortgage failure, Americans chuckle: “been there, done that”. The crucial differences between the US’ ability to pull itself up by its bootstraps and march, however painfully, toward recovery, and Europe’s inability to devise and implement effective monetary policies to shore up teetering member-states’ economies, is the fact that the US remains one nation, unified by a common culture, language and government, while the Eurozone is an artificially-engineered hybrid of 17 nations, separated by their widely-diverse cultures and traditions, and split along lines of language, religion and economic health. The fiscal and monetary stimulus initiatives undertaken by the US in 2008 and 2009—including the measures to stabilize banks—are impractical to institute in Europe, which lacks a common government and where all fiscal policy changes require unanimous consent.

Lacking the ability to quickly push through legislation intended to address the Eurozone’s current economic crises, Europe can do no more in the short term than stick its fingers in the proverbial dikes in Greece, (which presents the real possibility of exiting the Eurozone) and Spain (where $125 billion in emergency bailout funds were recently made available to shore up the Spanish banking system) and hope that it has enough fingers remaining to continue to keep Ireland, Portugal and Italy watertight. The cumulative effect of this combination of ad hoc measures has taken its toll on the Euro, which continues its gradual decline against the US dollar.

Whether or not you should invest in the Euro depends on two fundamental criteria: firstly, you must decide whether you are investing for the short or long-term, and secondly, you must have a clear picture of the type of investment that you are most comfortable making in terms of your risk profile. If, for example, you engage in Forex trading, then buying into Euros at current depressed prices may be a good option for you, but only if you are willing to hold them in your portfolio for the long-term and wait until the currency rebounds. Conversely, you can bet on the Euro’s continued decline and buy dollars now, banking on the dollar’s tendency to strengthen, albeit incrementally, in inverse relation to a decline in Euro value.

In truth, however, unless you already regularly follow the European currency markets and are familiar with its movements, then it’s more likely that you will base your decisions on whether to invest in or against the Euro on information you learn from the news; if this is the case, it’s probably wisest not to make any investment decisions, because by the time monetary news is reported in the media, the currency markets will have already reacted. Simply put, you’ll be too late.

Despite this fact, there are many additional ways that a retail investor looking to diversify his portfolio can invest in the Euro without remaining at the mercy of news reports and their associated time lag. For example, Europe’s economy is so bad that many of its stocks look good: it won’t take much research to identify issuers whose share price is temporarily on the downswing and snap up a tidy position. If you are not accustomed to making your own stock buys, then you can achieve the same effect by investing in one of the many reputable international mutual funds specializing in European equities. Either way, it’s clear that there is room for significant profit growth in Eurozone stocks.

Unlike the United States, where the Federal Reserve is currently keeping interest rates artificially low, Eurozone government paper offers higher interest rates. Investing in Euro-denominated bonds issued by one of the stronger Eurozone members such as Germany or the Netherlands and benefitting from the interest spread is another way to invest in the Euro in a manner that allows the retail investor to benefit from Europe’s current crisis. Eurobonds can be purchased from most brokerages and are relatively low-risk, making them an ideal addition to your investment portfolio.
There’s no reason to avoid investing in the Euro. As with any investment decision, make sure that you are picking the right investment vehicle to suit your risk appetite, your time frame, your knowledge base and your capital abilities. Keep in mind that the US is so heavily invested in Europe—both literally and figuratively—that if you formulate the right euro-based investment strategy, you might also benefit from the ripple effect of US support.

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