It’s one of the oldest tricks in the book.
The easiest way to unite a group of fractious, bickering human beings is to provide them a common enemy.
Britain just performed that role nicely for France and Germany.
Better yet, our apparent eviction from Europe’s inner sanctum has proved a great distraction tactic.
While the headlines focus on what it all means for the UK, the markets are ignoring the fact that Europe’s latest summit has done nothing to deal with the region’s problems. Indeed, it’s just demonstrated quite how out of touch with reality Europe’s leaders are.
That doesn’t bode well for the crisis ending soon. The good news is that there are plenty of other places you can put your money instead…
Friday’s deal doesn’t solve any of Europe’s real problems
As I said on Friday, the only way the current crisis in the eurozone will be resolved quickly is if the European Central Bank (ECB) decides to print as much money as it takes to drive down bond yields across the region.
To be clear, I’m not saying that’s a miracle solution. Money-printing won’t change the fact that the eurozone doesn’t work. The member countries are too different. All ECB printing would do is to buy time to find a ‘correct’ size for the eurozone.
So in an ideal world, Europe would then go through the long and difficult process of discovering which countries’ voters were comfortable with being part of a United States of Europe (Greater Franco-Germania, effectively). That would entail common tax law and common bond issuance among other things. In other words, for the eurozone to work, countries would have to be willing to give up their sovereignty.
Those who didn’t want to, or who couldn’t cope with the entry requirements, would have to be provided with an exit route from the eurozone. By easing the passage with printed money, it wouldn’t have to be a complete catastrophe.
It would be the honest, upfront way to do things. Having been through a financial crisis, everyone would now understand what they were signing up for.
But of course, that’s not going to happen. And it certainly isn’t what happened on Friday.
Instead, all Europe did was to say that in future they will be much stricter with countries who break the rules. How they will enforce these rules isn’t quite clear. The idea of trying to fine Greece for getting into too much debt is laughable.
The next credit crunch will be toughest on Europe
Meanwhile, European banks are going to have to raise huge amounts of capital, at a time when they are going to be competing with their own countries in the markets.
That points to a massive credit crunch in Europe. In short, banks in the region will have difficulty raising funds. If banks can’t raise more money to support the quantity of loans they have outstanding, then they need to shrink their balance sheets.
That means – as James Ferguson regularly points out in the pages of MoneyWeek magazine– that they’ll need to shrink the amount of lending they do to the likes of you and me: The best ways to play Europe’s banking crisis.
That’s bad news for European consumers and companies. Modern economies run on credit. So when the conduit of credit – the banking system – breaks down, it’s crippling for an economy.
And despite Britain’s decision to stay out of this latest treaty, we’re not immune to it either. Our banks are arguably in a better state than Europe’s but we’re certainly not home and dry.
So where should you put your money now?
We’ve been talking about high-yielding defensive blue-chip stocks for some time now, and we’re still keen on them. But it’s worth looking beyond the usual FTSE favourites. According to James, the US is closer to getting through its banking crisis than any of the other developed economies, so having some exposure to the market makes sense.
While it’s hard to argue that the overall market is cheap, the US is home to several high-quality names which do look good value now. These include technology giant Microsoft (Nasdaq: MSFT) and consumer staples group Johnson & Johnson (NYSE: JNJ). Microsoft yields 3.1% while J&J is on 3.6%.
Then of course, there’s Japan. Japan delivered an object lesson in how not to deal with a banking crisis during the 1990s. But it’s had a long time to work its way through that crisis. On top of that, the market is unquestionably cheap. That doesn’t mean it can’t get cheaper. But if it does, chances are that’ll be because the yen is getting stronger, which offsets some of the risk for a sterling investor.
In the current issue of MoneyWeek, Merryn Somerset Webb interviews John-Paul Temperley, co-manager of the Martin Currie Japan Alpha Fund. He tells us all about his favourite sector in Japan just now, and how to play it. Subscribers can read the piece here: Why you should keep buying into Japan. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
Our recommended article for today
Three risky but lucrative ways to spice up your portfolio
It’s all very well playing safe, but with inflation eating into your wealth, you must find income from somewhere. Here are three
risky but potentially very profitable options for the adventurous investor.