Why a Eurozone Break-Up Could Happen; What It Means for Your Investments
Countries in the common currency region are deteriorating very quickly. Look at the Spanish economy, for example: in the first quarter of 2013, it contracted 0.5% after continuing its slide from the last quarter of 2012, when it declined 0.8%. The Spanish economy, the fourth-biggest in the eurozone, has been contracting for seven successive quarters. (Source: “Austerity chokes off Spanish economy,” Deutsche Welle, May 30, 2013.)
Other troubled countries in the eurozone, such as Greece, Portugal, and Italy, continue to take a toll on the region, as well. In April, unemployment in the eurozone reached another record-high, registering at 12.2%, compared to 12.1% in March; 19.3 million individuals were jobless in the euro area. (Source: “Unemployment statistics,” Eurostat web site, last accessed June 5, 2013.)
With the economic slowdown gaining a stronger grip on the region and with major economic hubs like Germany and France begging for growth, there are movements erupting across the eurozone demanding the abolishment of the economic bloc.
Germany has witnessed a rise of a new party called the Alternative for Germany party. According to a recently conducted poll, seven percent of Germans said they would “certainly” vote for this anti-euro party, while 17% said they would “probably” vote for them. (Source: Geiger, F., “New Anti-Euro Party May Enter German Parliament – Poll,” Wall Street Journal, April 6, 2013.)
But it’s not just Germany; other countries in the eurozone have the same kind of movement spreading. For example, there are political parties in Portugal that want out of the eurozone and two parties with a presence in the Italian Parliament want a referendum over staying in the economic bloc. (Source: “Idea of Euro Exit Finds Currency in Portugal,” Wall Street Journal, May 27, 2013.)
That said, could the eurozone really fall apart? Before going into further details, let’s get one thing straight: the implication of the eurozone breaking up can be massive, to say the very least.
According to a study from Prognos, an economic research group, if Greece, Portugal, Spain, and Italy leave the eurozone, it will cost the entire global economy $22.3 trillion by 2020. (Source: “‘Devastating Impact’: Euro Exit by Southern Nations Could Cost 17 Trillion Euros,” Spiegel, October 17, 2012.)
Regarding the breaking up of the eurozone, the European Central Bank (ECB) has made it clear that it will do whatever it takes to protect the region from collapsing. The ECB is willing to buy an unlimited amount of bonds from nations and print more money, if need be.
Forgetting what the ECB said, if the scenario of the eurozone breaking up does come into play and countries decide to leave, investors should know that it can take a heavy toll on their portfolio, regardless of if they are exposed to eurozone countries or not—even if they are fully invested in North American equities.
In situations like these, investors need to move towards places that can provide safety. One investment that comes to mind is gold bullion. It is considered a safe haven, protecting wealth in times of uncertainty.
One minor setback is that buying and storing it can cost investors quite a bit. They may want to get exposure to gold bullion by buying into exchange-traded funds (ETFs) like SPDR Gold Shares (NYSEArca/GLD) or iShares Gold Trust (NYSEArca/IAU).