Go Europe, go!
Sure, there is plenty of uncertainty to go around. Yes, many risks remain. But there has been so much negative coverage about Europe and its currency that the markets have already priced in a large part of the nastiness. What the markets may not have priced in is the possibility that something could actually go right – or at least a less dire outcome that many are predicting.
Of course, we can’t ignore reality. European policymakers need to get their act together and follow through on their promises. On July 2, 2012, the European Central Bank cut the prime lending rate by 0.25% to an all-time low of 0.75%.1 When they met again in early August they held the rate at 0.75%.2
That rate cut was one of many necessary incremental steps in what we believe will be a slow, sometimes painful process. As such, investors need to be ready for some short-term volatility along the way. Here’s what we think needs to happen to keep moving toward a resolution:
- Greater European-wide oversight. Many countries are reluctant to forego sovereignty, but greater coordination is needed
- Re-capitalization of significant banks to instill depositor confidence
- FDIC-like deposit insurance – some type of depositor insurance will assist in keeping local money local
Together, these elements can help improve market sentiment. The whole plan does not have to be in place for this to happen, but solid commitments and clear agreements will need to occur sooner rather than later.
For more on helping investors keep European politics, market sentiment, and more in perspective, Consider This.