Europe is in crisis. You’ve surely witnessed scenes of rioting and anarchy playing out on the streets of one of the world’s oldest democracies. What exactly is happening in Europe? Think of the EU (European Union) as your family. One family member (Greece) engages in reckless financial practices and runs up a huge amount of debt — which it is now unable to pay. This family member approaches other members of the family (namely Germany) asking for more loans to help it pay other loans which are on the verge of default. This creates a serious dilemma. If more loans are not made, then old loans on the books of other EU domiciled banks go bad thus creating a financial storm throughout the continent akin to what happened in the U.S. with bad mortgages. Alternatively, if more money is lent it only serves to reinforce bad behavior, and it doesn’t address the underlying problems which created the situation in the first place.
The EU, and its Euro currency, now face significant problems. The reforms in Greek financial practices being insisted upon have resulted in violence erupting on Athens streets. Whatever the outcome, it appears that the Euro is headed for a rocky road. How does this effect you? Well, those planning a future trip abroad will benefit from the increased buying power of the U.S. Dollar. Conversely, those working for employers who sell products abroad can suffer when a strengthened dollar serves to hurt international sales. As institutions scale back their Euro holdings, it is likely that investors will seek other “safe havens” — including gold and commodities. This can translate to rising crude oil prices resulting in a higher price paid at the pump. The ramifications of the current European crisis can be widespread — let’s all hope they get their house in order.