From an investor’s perspective, Europe hasn’t really been a good investment for the past 10 years.

Of course, the European Union is a political and social order, and proponents of this order will say that stock prices aren’t a true measure of success. But stock market prices do offer insights into political stability and social progress.

Prices are immune to political demagoguery because investors vote in the market with their money. Politicians can say, “Don’t worry, be happy,” but investors see through these words and base their decisions on dollars and euros.

As one example, politicians can’t make Greece sound successful. Greece was a winner from 2006 until 2008, but the chart below shows that Greece now seems to symbolize the failure of the European experiment.


The German public has been strongly opposed to using their tax dollars to subsidize banks in other countries. Unless that changes, the EU might not survive.


Each line shows the country’s stock market performance since the beginning of 2006, measured in the country’s local currency. In Greece, the Dow Jones Greece Total Stock Market Index is down more than 90% measured in euros. Germany’s DAX Index has more than doubled, outperforming the U.S.-based S&P 500. Investors in France and Italy have suffered multiyear declines, while investors in the United Kingdom have enjoyed gains averaging more than 2% a year.

The tragedy of Greece is well-known. The next act in that play is unfolding now as the country negotiates with the EU for debt relief.

Price action confirms that the next crisis is most likely to appear in Italy. After that, assuming the euro survives, the crisis is likely to roll through France.

Italian banks face a trillion-dollar crisis that amounts to almost half the size of the country’s economy. Italy simply doesn’t have enough money to fix its banks. That means the EU will have to step in, and that puts pressure on Germany.

In the past, the German public has been strongly opposed to any proposal that used their tax dollars to subsidize banks in other countries. Unless that changes, the EU might not survive. That makes Germany the market to watch.

For now, the German DAX Index is in a trading range. A new high will signal a buy for all of Europe, while a breakdown will signal caution for markets around the world. Until Germany provides a signal, investing in Europe requires skill to find the few potential winners among the ruins.

Headline writers will focus on Greece and Italy in the coming months. Winning investors should focus on Germany for clues as to how the crisis will be resolved.


Michael Carr, CMT