What's next for Europe?

3 July 2012

The eurozone continues to teeter on the brink of disaster with Greece, Spain and Italy struggling to keep their debt under control, making investors increasingly nervous.

In June, Spain and Italy's bond yields hit dangerous highs as the markets showed concern over both countries' economic woes. Meanwhile, Greeks went to the polls to vote in a new government to tackle the country's fiscal crisis.

All the uncertainty has hit trading volumes with many people choosing to simply sit out the crisis away from the stockmarket. So what should you do with your investments?

Prolonged recession

Many experts expect the eurozone to endure a prolonged recession, regardless of what happens to individual countries.

"It will take substantial action from the world's largest central banks to turn the global growth cycle back up again," says Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment. "In the meantime, we remain cautious on stocks and commodities, preferring gilts, global property and cash in our multi-asset funds."

If you are hoping to stick with stocks, "blue-chips with strong balance sheets, superior business models and attractive dividends remain the stand-out investment in financial markets," says Barry Norris, a partner at European fund management boutique Argonaut Capital Partners.

Check out our latest shares to buy, hold and sell.

Can the euro still work?

But it hasn't all been bad news.

Greece's latest election result was a good outcome for the eurozone, with the New Democracy party scraping a win. The party is in favour of Greece sticking to the terms of its bailout deal, which will see Greeks enduring deep cuts in order to try to bring the country's economy under control.

"Only time will really tell, however, if Greece can drag itself out of the mire from here, but the odds remain stacked against both Athens and the eurozone as a whole," says Jason Gaywood, director of currency specialist HiFX.

"Sooner or later, the fundamental question has to be asked as to whether we can realistically expect one interest rate and one currency unit to work with economies as divergent as Germany and Greece."

And even if Greece can sort itself out the problems facing the much larger economies of Italy and Spain may well continue to destabilise the eurozone.

In June, an £80 billion loan to Spain failed to reassure the markets, with yields staying above 7% - a euro-era record for the country. These rising borrowing costs mean Spain may soon be unable to finance its own debts and be forced to seek an international bailout.

Greece, Ireland and Portugal were all forced to do the same when their 10-year bond yields rose above 7%. Italy is also struggling with rising debt costs as its bond yields have risen above 6%.

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