Sunday, June 1, 2014

The "All Else" Part 6, The Eurozone...

The European Union (EU) dates back to the mid 20th Century---when, in 1951, Belgium, France, West Germany, Italy, the Netherlands and Luxembourg signed the Treaty of Paris. Its goal was essentially to unify Europe after WWII. It initially called itself the European Coal and Steel Community, then the European Economic Community, then, finally, upon the signing of the Maastricht Treaty in 1993, the European Union. Over the course of those 42 years, the coalition picked up 22 additional countries. The EU itself is the world's largest trading bloc. 

The Eurozone consists of the 18 EU members that have adopted the Euro, which was introduced in 1999 (with 11 adopting members), as their national currency. All but two EU members have agreed to adopt the Euro---the UK and Denmark negotiated opt-outs when the EU was formed. Latvia became the 18th (there are criteria to enter) on January 1 of this year. Lithuania is scheduled to join on January 1, 2015.

Without getting too deep into the weeds, suffice it to say that 18, ultimately 26, countries, with different economies, cultures, habits and disciplines, are taking a whole lot for granted when they all agree to operate under one common currency. Surely, if they had it to do all over again, countries such as Greece would have had far higher bars to hurdle if they were to ever be allowed to join. While many yet speculate that there will be defections, or ejections, there is, in my view, very little chance that we'll ever see the return of the drachma (more on that in Part 7).

So why is the Eurozone so important to the global financial markets? Well, as I suggested above, the EU is the largest trading bloc on the planet---and the Eurozone members make up more than half. Economic woes for the Eurozone translate to economic concerns for the rest of the world (i.e., the suppliers to, the customers of, and the investors in the EU community).

For me---in addition to being keenly interested in the state of their economies, the trend of the Euro (vis-a-vis the dollar) and their monetary policy (more on that in part 7)---I apply the same valuation metrics to the non-U.S. developed market indices---which are comprised of the companies (many of them domiciled in the Eurozone) whose stocks occupy our clients' non-U.S. developed market equities allocation---as I do the broad U.S. market and its many sectors.

In essence, the Eurozone is hugely important in the grand investment scheme of things...

1 comment:

  1. […] Part 6 of this series I wrote that “18, ultimately 26 countries, with different economies, cultures, […]