Last week, the European Central Bank cut its 2012 forecast due to the area's high unemployment and its seeming inability to keep growth up. But the bank said it was looking for growth in late 2013 as things slowly got better. But then, last weekend, Italian Prime Minister Mario Monti said he would be stepping aside after former Prime Minister Silvio Berlusconi's party withdrew its support for him.
The market reacted in its typically calm fashion, with Italy's bond yield jumping up and its stock market falling down. The Euro fell back against the dollar, though it's not near the low levels investors saw earlier this year. But even with the bad news, Europe is still a great place for American companies looking for growth. Here's why you should embrace the Old World.
Down but not out
One of the best reasons to ride out a recovery is that recoveries offer great "buy low, sell high" opportunities. Obviously that comes with risks, but those risks can be rewarded handsomely. Investors who took a chance after the Internet purge in the early 2000s now have megabaggers in some of the biggest names in tech. Great companies will often fall on temporarily bad times that drive their stock prices down, but that don't seriously challenge their long-term prospects.
Part of my assertion that you should stick with Europe is based on investment time horizons. I have a while until I need to cash out, and in general, Motley Fool investors are in the market for the long haul. This means setbacks that last a year or even five years can be helpful. They offer opportunities to buy into companies that have solid fundamentals and long-term prospect but are suffering at the moment.
And Europe is suffering now. Smart companies that are invested in Europe can take this chance to cut costs and build out while labor and borrowing are inexpensive. Companies like Starbucks (NASDAQ: SBUX ) have made a commitment to operating in Europe and can make huge strides toward profitability when the rest of the economy is depressed.
The Italian worry
Thinking about Europe as a whole continues to be a challenge investors have to face. There are massive differences between the German economy and the Italian economy, for instance. But it's the combination of those economies that gives the euro its value. That can be great news for companies that want to expand in Europe, like Gap (NYSE: GPS ) or Lululemon (NASDAQ: LULU ) . Both companies now get to build in Europe on a weaker Euro, but their expansion isn't limited to weak areas. The downward pull from Italy makes it cheaper -- in U.S. dollars -- to do work in France.
Of course, if the economies of Italy, Greece, and Spain slide further, the long-term outlook might not be so rosy. At the very least, the "long term" might be much longer than investors are currently hoping for. Again, the importance of a clear investing time horizon comes into play.
The bottom line
The temporary crisis of faith in Italy is just that -- temporary. French Finance Minister Pierre Moscovici nailed it when he said, "[Berlusconi] is not the worst opponent that the progressive or simply serious forces could have." In fact, it has been suggested that Monti's resignation may open the door for him to run against Berlusconi in the next election. If Monti were to win, it would signal that not only has Italian policy turned a corner, but that Italian voters have, as well.
Over the past 4,000 years or so, Europe has managed to pull itself back together time and time again, and while that might be longer than most investors' timelines, it proves an important point: Europe muddles through. If you have the time and the faith, there are lots of great companies that can use the slowdown in Europe as an opportunity to grow.
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