Things Just Got a Lot More Complicated in Europe

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Remember how we supposedly had that little sovereign-debt problem solved in Europe thanks to the hard work of Germany's Angela Merkel and France's Nicolas Sarkozy? Well, we may want to cancel the celebration dinner.

Pivotal elections in France and Greece over the weekend have the eurozone once again moving toward total failure.

In France, incumbent Nicolas Sarkozy was voted out of office in favor of Socialist Party nominee Francois Hollande, whose agenda involves reworking the region's debt-bailout package. Hollande favors considerably more government spending as opposed to many pundits who think France needs to considerably cut spending in light of its rapidly rising debt levels to GDP. If Hollande gets his way, France could also become the least wealthy-friendly country in the world, with a nominal tax rate of up to 75% on top earners.

Greece, a country that has already effectively defaulted on its debt obligations and whose previous government had negotiated a 130 billion-euro bailout package that had private lenders taking, in some cases, up to a 75% hit to the value of their debt holdings, appears to be in complete turmoil once again. The pro-austerity conservative parties, New Democracy and Pasok, lost a significant amount of their support as the electorate voted in left-wing, anti-austerity party members. With no clear majority in the Greek parliament, the probability of forming a functional (key word there) government just dropped by a lot.

So where does this leave us?
Negotiations in Europe have moved at a pace that makes molasses in winter look like Speedy Gonzalez. The possibility that France could back out of future debt negotiations with Spain's debt problem looming large isn't going to sit well with investors around the world.

As for Greece, the problem may not seem as immediate, since its government has been largely dysfunctional from the beginning of this debt crisis, but it may make implementing already agreed-upon austerity measures even tougher. I would overwhelmingly say these elections are bad news for U.S. investors who favor certainty as opposed to change.

What does this mean for your money?
With many investors trading more on emotion than actual earnings results, it's likely we can expect more pressure on European-based businesses. The fallout in some companies can be, at least to some extent, justified as with large Spanish banks, Banco Santander (NYSE: STD  ) and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) . Both of these institutions are dealing with ridiculously high unemployment rates and commercial real estate portfolios littered with potential problem loans.

But we're also likely to see pressure on companies that won't be directly affected by austerity. Two such companies that may get lumped into the "guilty by association crowd" are France Telecom (NYSE: FTE  ) and U.K.-based oil services company BP (NYSE: BP  ) .

France Telecom has been on a steady downtrend over concerns that its mobile business may suffer as Europeans cut back on discretionary spending. What investors are failing to take notice of is France Telecom's strong international growth in Sub-Saharan Africa and even in troubled Spain.

As for BP, weakness in the stock makes little sense because so many of its oil assets are diversified throughout the world. There may be some give and take as emotional oil traders react to the unpleasant news out of Europe, but that's hardly a game-changer for a company that's putting its Gulf of Mexico PR nightmare in the rearview mirror.

United they stand, divided they ____?
It's tough to say whether the eurozone as a whole is headed into recession, but I can't figure that the mixed results in the elections this weekend helped that cause. I've postulated before that prolonged recessions seem inevitable in Greece and Spain, and austerity measures designed to curb rapidly rising debt levels in France and Germany are likely to curb any economic strength. In short, the possibility of a Euro-recession is a real possibility.

The secret to survival over the next few months, until we get a better understanding of how these new governments will cooperate with one another, is to focus on strong cash flow businesses that tend to perform well even in stagnant times. This means telecom and health-care companies just might be your best shot at betting on a European recovery.

Disagree with me? Tell me about it in the comments section below.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He sees Europe as the ultimate made-for-TV drama. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of France Telecom. Motley Fool newsletter services have recommended buying shares of France Telecom. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that won't default on you.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 07, 2012, at 6:57 PM, longstd wrote:

    First and foremost.

    The eurozone was headed for this recession b/c of the market housing boom. Yes jobs were lost and people lost much of everything. On the upside over 75 percent are still working. Let's go back now; look at the u.s. Recession began around 08. Much recovery has happened since then. What was and is still needed for the U.S is time. As does the eurozone. You can't fix it in a day nor a year. A recovery happens when people work together and strive for new opportunities. Banks will always make money. Bigger banks make well..... you can figure that out. STD. has outstanding loans because of the job losses. THE U.S has many people unemployed and the banks aren't closing up shop because the bigger banks will always have money, always get a bailout.


    Without banks there is less production. There would be fewer opportunities for new jobs, new construction, schooling loans, and so forth. STD is not just going to go away. It has been less rewarding because the people can't find work. New jobs will arise and opportunities are around and it's the banks that can let that happen. Im long STD.

  • Report this Comment On May 07, 2012, at 7:50 PM, TheDumbMoney2 wrote:

    I fear you are letting a little too much ideology in, at least as regards your representation of what happened in Greece.

    In reality, it was the centrist parties that suffered the worst in Greece. And in addition to the gains the communists saw, the rightwing neo-faschist party, Golden Dawn, saw its support go up 700%, from 1%, to 7%, as well.

    The real story in Greece is a very common one, as I have said on this website multiple times over the years while arguing with people like jakilathehun: however justified it is, if you hurt poor people too much, if you tell them to eat cake and lecture them about individualistic ideals they have failed to live up to, they tend to become either communists or faschists.

    Hence, communitarian impulses are justified as a bullwark against Left/Right extremism. FDR certainly understood that here. Germany does not. Ironically, as Germany has struggled so hard to learn the lessons of Weimar re: hyperinflation, it has failed to learn the even broader lesson of that era, which is that telling the poor they need to become even poorer and rely even more exclusively on themselves is a recipe for Golden Dawn and the Communists to displace moderate elements.

    The only thing about this that boggles my mind or surprises me at all is that Greeks and their politicians did not exit the Eurozone two years ago, as they should have done and still should.


  • Report this Comment On May 07, 2012, at 9:00 PM, longstd wrote:

    Its perfectly normal for investors to overreact. With all the news and headlines spreading wildfire, STD is still just a bank that is available for bargain prices. With the media infiltrating current investors another investor stays on the side line to miss out on an opportunity. Any one investing needs to look beyond and look to the value what they are paying for. The ones that get shorted are the ones that base decisions on articles. Investors that just hold on regardless of the press will reap rewards in the long run. XD

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