Question
I cant believe Germany are going to carry on bailing out the weaker EU Countiries and that the European Union will break up - if this does happen what do you think will happen to the stock market and financial markets ?Answer
In the short term stock markets would probably fall quite heavily if the EU were to break up, due to all the uncertainty it would cause - stock markets don't like uncertainty. Gold would probably rise, as it's popular in times of uncertainty, while demand for bonds issued by rock solid governments would probably rise (as investors flock to safety).
However, after the initial fallout, stock market fortunes moving forwards would probably be quite mixed.
Companies with a high exposure to the weaker countries might generally suffer, as those consumers and governments would likely have less to spend due to the severe austerity measures that would be required to try and shore up their economies. Banks with high lending exposure in those countries would probably suffer too due to rising bad debts.
However, companies with little/no exposure to the weaker countries are unlikely to be affected that much, if at all. How the potential break up of the European Union would affect cross-European and global trade is less clear - EU trade agreements would theoretically be torn up, although they'd need to be replaced by something. Germany is a big exporter and would probably put its own agreements in place pretty quickly.
The euro would also die, with eurozone countries reverting back to their own currencies. This would help stricken countries as their currencies would weaken to the point that foreign investors are prepared to lend to the governments at affordable rates (i.e. they can buy government bonds at worthwhile prices thanks to favourable exchange rates) and make exports cheaper.
I can't see the eurozone and European Union disintegrating but, like you, I doubt Germany and France will continue bankrolling the weaker economies (the main contenders being Greece, Ireland, Portugal and Spain) forever. I think it's more likely that countries struggling to borrow will be kicked out of the euro, which should effectively allow them to borrow again via the markets (by making their debt cheap via devalued currency - see above). Whether or not they remain in the European Union I'm not sure, but I think that decision will have less impact on markets by the time its eventually made (assuming it needs to be).
In summary, I think we can probably expect a rather bumpy ride over the next year or two. As well as all the potential problems in Europe, spending cuts and tax rises are still taking hold back home and energy/food price inflation remains a problem pretty much the world over. On the bright side, the credit crunch has forced many companies to become leaner and more efficient, so although the climate is tough there are still plenty of profits being made.
I cant believe Germany are going to carry on bailing out the weaker EU Countiries and that the European Union will break up - if this does happen what do you think will happen to the stock market and financial markets ?Answer
In the short term stock markets would probably fall quite heavily if the EU were to break up, due to all the uncertainty it would cause - stock markets don't like uncertainty. Gold would probably rise, as it's popular in times of uncertainty, while demand for bonds issued by rock solid governments would probably rise (as investors flock to safety).
However, after the initial fallout, stock market fortunes moving forwards would probably be quite mixed.
Companies with a high exposure to the weaker countries might generally suffer, as those consumers and governments would likely have less to spend due to the severe austerity measures that would be required to try and shore up their economies. Banks with high lending exposure in those countries would probably suffer too due to rising bad debts.
However, companies with little/no exposure to the weaker countries are unlikely to be affected that much, if at all. How the potential break up of the European Union would affect cross-European and global trade is less clear - EU trade agreements would theoretically be torn up, although they'd need to be replaced by something. Germany is a big exporter and would probably put its own agreements in place pretty quickly.
The euro would also die, with eurozone countries reverting back to their own currencies. This would help stricken countries as their currencies would weaken to the point that foreign investors are prepared to lend to the governments at affordable rates (i.e. they can buy government bonds at worthwhile prices thanks to favourable exchange rates) and make exports cheaper.
I can't see the eurozone and European Union disintegrating but, like you, I doubt Germany and France will continue bankrolling the weaker economies (the main contenders being Greece, Ireland, Portugal and Spain) forever. I think it's more likely that countries struggling to borrow will be kicked out of the euro, which should effectively allow them to borrow again via the markets (by making their debt cheap via devalued currency - see above). Whether or not they remain in the European Union I'm not sure, but I think that decision will have less impact on markets by the time its eventually made (assuming it needs to be).
In summary, I think we can probably expect a rather bumpy ride over the next year or two. As well as all the potential problems in Europe, spending cuts and tax rises are still taking hold back home and energy/food price inflation remains a problem pretty much the world over. On the bright side, the credit crunch has forced many companies to become leaner and more efficient, so although the climate is tough there are still plenty of profits being made.
Read this Q and A at http://www.candidmoney.com/questions/question524.aspx
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