Market Overview

Traders Guide to the European Politics: 4 Things You Need to Know


European politics have been one of the main forces moving the U.S. markets in the past couple months. Traders have become accustomed to comments by politicians whose names are unpronounceable and daily rumors that can cause the Dow Jones Industrial Average to swing up and down hundreds of points.

For example, the other day reports came out that the EU officials are discussing doubling the rescue systems firepower and merely a report of discussions moved Dow 60 points higher.

Unfortunately, the European politics can be very difficult to understand, as there are many players and multiple layers that all have a different amount of power on various issues. Therefore, learning to know who actually are the important movers and shakers makes trading the news easier and can help you get ahead of the markets.

Benzinga listed four important factors in the European politics that help you get started:

1. Local Politics vs. EU Politics

First of all, it is important to understand the difference between the European Union Parliament and the local parliaments that each country has. The EU citizens elect the members to their local parliaments and EU Parliament as well. For example, the Italian people elect the members to the Italian parliament and also the members of European Parliament from Italy.

The European Parliament and Commission mainly set guidelines or directives that the local governments implement. Also, the EU wide programs, such as rescue packages generally need to be approved by the local governments. This is the reason why the Finnish Government's reluctance to accept the Greek bailout package without collateral caused nervousness in the U.S. equity markets.

It should also be noted that, although the members of European Parliament are supposed to represent their parties, they tend to have strong national interests.

2. European Central Bank's Role

The ECB administers the monetary policy of the Euro Zone countries. In a sense it serves the same purpose as the Fed except the ECB has only one mandate, to maintain price stability. Hence, the central bank has historically been very reluctant to lower interest rates or use any kind of easing to pump more money into the economy.

The traders should also remember hat the ECB only controls the monetary policy of the Euro Zone countries and not all the EU countries are Euro members. Additionally, each Euro Zone member country has its own central bank that supports the ECB's mission.

3. Large Countries (Rich) vs. Small (Poor) Countries

The countries do not hold the equal amount of power in the EU. Generally, the large and rich countries are the more dominant and can put a lot of economical and political pressure, especially, on the countries that are struggling financially.

This is important to keep in mind the next time you are debating whether to trade on the comments of the Slovakian prime minister. The country's GDP is 38 times smaller than Germany's GDP, so it is not difficult to understand who holds the real power. This is the main reason we keep seeing Germany's Angela Merkel and France's Nicolas Sarkozy in the media.

Although, the comments by these “less important” politicians may cause quick movements in the markets it is not to wise to base you longer term investments on them.

4. Euro Countries vs. Non-Euro Countries

Lastly, it is important to keep in mind that not every European Union country is a part of Euro Zone. The best example naturally is England (that's why we still trade GPB/USD), but there are also other countries that did not adopt the Euro currency and obviously these countries do not have any power over the decision regarding the future of Euro.

Hence, any statements on Euro by the Non-Euro countries can be disregarded, as they are merely opinions. Especially, the English politicians and bankers have been eager to provide comments on the Euro crisis, but traders should not act on these headlines.

Overall, this guide is a very simplified way to explain the European politics that currently are very complicated. It should help the traders filter out some of the noise and focus on the headlines that have a profound impact on the future of Euro Zone.

EU's impact on the U.S. equity markets will eventually decrease, but until then it is important to stay up-to-date with the latest developments. Good TV shows for that purpose are Bloomberg Rewind hosted by Matt Miller and Fareed Zakaria's GPS on CNN.

ETFs, such as Vanguard MSCI Europe ETF (NYSE: VGK) and ProShares Short MSCI EAFE ETF (NYSE: EFZ) are possible ways to trade the current crisis in Europe.

You can follow me on Twitter @TuomoKallio

Posted-In: Angela MerkelLong Ideas Short Ideas Politics Economics Media Trading Ideas General Best of Benzinga


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