Governments of the European Union will need to reduce deficits and public debts that were incurred during the revitalization process of their economies, or the European Central Bank will raise interest rates, hampering the region’s economic recovery, reports Paul Taylor for The New York Times.

The Bruegel research group proposed that the E.U. should recapitalize and restructure banks, cut budget deficits and tighten monetary policy – in that order. (Four reasons Europe could make a comeback).

Meanwhile, the recovery could be uneven and various countries tackle their problems in their own way:

• E.U.’s Monetary Affairs Commissioner Joaquin Almunia stated that Germany’s unbalanced economic strategy failed to raise domestic demand and caused problems for the whole region.
• France and other countries were unable to consolidate their budgets and went into the crisis with high deficits.
• The current situation shows individual countries in the eurozone striving for their own well-being, and in Germany’s case, at the expense of others. (Watch Tom talk about Europe on CNBC).

Instead of picking individual countries if recovery will be uneven, a better way to invest in Europe may be through an ETF covering the region – this helps mitigate your risk.

• iShares S&P Europe 350 Index Fund (NYSEArca: IEV): up 32.9% year-to-date

• Vanguard European Stock (NYSEArca: VGK): up 36.2% year-to-date

• BLDRs Europe 100 ADR Index Fund (NYSEArca: ADRU): up 33.9% year-to-date

Countries that use the euro sent their finance ministers to meet as the euro appreciated against the dollar, reducing gains that would have aided the region’s economic recovery, writes Aoife White for The Associated Press. The eurozone’s foreign exports dropped 23% in August year-over-year, the quickest drop this year.

The eurozone is projected to pull out of the recession in the third quarter. Rising unemployment is still a problem for the region. (Our definitive guide to currency ETF investing).

For more information on Europe, visit our Europe category.

• CurrencyShares Euro Trust (NYSEArca: FXE): up 7.7% year-to-date

Read the disclaimer, Tom Lydon is a board member of Rydex Funds.

Max Chen contributed to this article.

European countries came together in an attempt to make progress toward a true open free-trade block, and this economic and monetary union was written into the EU treaty with the creation of the European Central Bank that now has 16 countries fixed to a relatively new currency, the euro, according to the Economist.

Since the inception of the euro, the average inflation rate in the region has been a little more than 2%. Job creation increased but growth trends did not gain much. Furthermore, the euro did not bring with it greater prosperity or the political union some thought it would.

The financial crisis brought to light the imbalances that have built up in the euro zone. While the Mediterranean countries dug deeper current-account deficits, Germany experienced huge current-account surpluses.

People are wondering whether this motley group of countries can continue sharing the same monetary policies, whether the crisis will jump start economic reform or whether  it will attract or repulse regional countries. Another aspect of the debate is if the EU will need greater political union to function efficiently.

• iShares S&P Europe 350 Index Fund (IEV): up 2.8% year-to-date

• Vanguard European Stock (VGK): up 5% year-to-date

• BLDRs Europe 100 ADR Index Fund (ADRU): up 3.7% year-to-date

Fore more information on Europe, visit our Europe category.

Max Chen contributed to this article.

An official from the Chinese Ministry of Commerce stated that the government will send investment and procurement delegations to Europe, reports Diao Ying for China Daily.

These outward investment ventures are seen to help stabilize foreign trade and industry structure. It is also an opportune time to start looking for overseas assets since they are now dramatically cheaper as a result of the economic downturn.

The Chinese government has sent delegations to Germany, Spain, Switzerland and Britain. They will also be visiting France later on. The trade mission already signed contracts worth more than $13 billion. Another team is also in the United States negotiating $10.6 billion in trade and investment contracts.

• Vanguard European ETF (VGK): down 0.8% year-to-date

• PowerShares FTSE RAFI Europe Portfolio (PEF): up 5.6% year-to-date

• BLDRs Europe 100 ADR Index Fund (ADRU): down 2.9% year-to-date

Max Chen contributed to this article.

Europe didn’t really have problems in subprime mortgages, but nonetheless, the effects of the United States’ problems were far-reaching. The economies of Europe are seen as tightly linked to those of the rest of the world, writes Jack Ewing for Spiegel Online International.

Bankruptcies are up 11% on the continent. Unemployment reached 7.4% in December compared to 6.8% a year earlier. The International Monetary Fund (IMF) predicts that output in the European zone may fall by 2% this year.

What are the problems?

• One issue is that there is no single government to stand up and create a coherent rescue plan. The European Central Bank has broad powers over the economy, but it has fewer policy tools like the ones implemented by the U.S. Federal Reserve.
• Europe does not have the necessary institutions with a clear mandate to respond to banking problems on a regional level. The union probably needs a single securities and bank regulator instead of a hodgepodge of national bodies, and there are talks of creating a Europe-wide deposit insurance fund.
• The EU is the United States’ largest trading partner, as well as a hotspot for Asian exports. Much of Europe is dependent on exports. Unfortunately, slumping exports, coupled with lower consumer spending, has weaker companies across Europe closing up shop. But even the healthy companies are struggling to get by, too.
• In poorer European countries, some nations have large current account deficits and they are now bogged down by the cost of repaying loans that have grown after depreciating currencies. It is seen that some countries with weakened currencies want to adopt the euro to protect themselves from further depreciations.

Europe has some competitive advantages, such as their fervent investment in nuclear, solar and wind power on top of a history of energy conservation, which makes them less vulnerable to oil shocks. Their consumer debt is also rather low and more conservative lending practices could led to a faster recovery of their financial institutions.

British Prime Minister Gordon Brown, for his part, urged Congress to “seize this moment” and pull together to fight the recession, global climate change and thwart Iran’s nuclear ambitions, reports Ben Pershing for The Washington Post. He also pushed for an agreement on rules and standards for all banks, ahead of the G-20 summit in April.

• Vanguard Europe Pacific ETF (VEA): down 17.1% in the last month
• BLDRs Europe 100 ADR Index Fund (ADRU): down 17.9% in the last month
• Vanguard European ETF (VGK): down 18.7% in the last month
• PowerShares FTSE RAFI Europe Portfolio (PEF): down 18% in the last month
• PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD): down 13.9% in the last month

It all depends on what you are specifically looking for. The various European funds have varying allocations to different companies in specific countries. They will also allow a potential investor a distinct amount of exposure with disparate expenses and performances.

Note that recent events have led the countries within the European Union to contemplate their economic hardship. The United Kingdom, a major percent holder in European ETFs, has also fallen on hard times with a recent announcement of its recession.

Nevertheless, people can still choose to invest in available European ETFs as new trends present themselves.

BLDRs Europe 100 ADR Index Fund (ADRU) has total assets of $15 million, 100 holdings, and an expense ratio of 0.30%. The fund is based on The Bank of New York Mellon Europe 100 ADR Index, a capitalization weighted index designed to track the performance of 100 European market-based depositary receipts.

Top 10 country allocations: U.K. 43.7%, France 11.3%, Switzerland 10.1%, Germany 9.4%, Spain 8.5%, Netherlands 4.4%, Italy 3.1%, Finland 2.1%, Denmark 1.1%, Ireland 1.1%

Sector allocations: consumer discretionary 3.3%, consumer staple 7.7%, energy 21.5%, financials 19.4%, health care 16.6%, industrials 4.7%, information tech 5.3, materials 6.5%, telecom services 13.7%, utilities 1.4%

Vanguard European ETF (VGK) has total assets of $16.9 billion, 513 holdings, and expense ratio of .12%. Vanguard European ETF tries to track the performance of a benchmark index that measures the investment return of stocks located in the major markets of Europe.

Top 10 country allocation: U.K. 30.2%, France 15.8%, Germany 13.5%, Switzerland 12.7%, Spain 7.0%, Italy 5.5%, Netherlands 3.8%, Sweden 3.1% Finland 2.1%, Denmark 1.3%.

PowerShares FTSE RAFI Europe Portfolio (PEF) has total assets of $4.5 million, 1000 holdings, and expense ratio of .75%. It is based on the FTSE RAFI Europe Index, which tracks the performance of the largest European equities.

Top 10 country allocations: U.K. 32.3%, France 17.1%, Germany 13.4%, Switzerland 8.7%, Italy, 7.5%, Spain 5.5%, Netherlands 4.7%, Sweden 3.3%, Finland 1.7%, Belgium 1.4%.

Sector allocations: consumer discretionary 9.9%, consumer staples 10.0%, energy 14.2%, financials 25.9%, health are 7.5%, industrials 8.3%, information tech 1.9%, materials 5.9%, telecom services 9.7%, utilities 6.8%.

iShares S&P Europe 350 Index (IEV) has total assets of $1.2 billion, 348 holdings, and an expense ratio of 0.60%. The index fund translates investment results that correspond to the performance, before fees and expenses, of stocks across a range of industries in continental Europe as represented by the S&P Europe 350 Index.

Top 10 securities holdings include: U.K. 11.5%, Switzerland 8.1%, France 2.7%, Spain 2.0%

Sector allocations: financials 18.5%, consumer staples 12.9%, energy 12.8%, health care 12.6%, industrials 8.6%, telecom services 8.6%, utilities 8.5%, consumer discretionary 7.4%, materials 6.8%, information tech 3.0%.

On average, American investors have anywhere from 2%-20% exposure in foreign markets. This can prove dangerous for a few reasons.

Tim Hanson for The Motley Fool says that this leaves you too vulnerable to the slowing in the United States’ economy. Declining home values, a weaker dollar and a beat up portfolio are not a good mix.

Second, when you ignore foreign markets, you’re all but assuring that you are going to miss out on the greatest economic growth forecast to come in the next 10 to 15 years. From a growth standpoint, China, India, Brazil and even Vietnam and Mexico have more potential going forward.

While growth has slowed or even reversed course in most markets in the world, domestic and global, this won’t always be the case. Valuations on emerging markets may be looking ripe in the near future.

Foreign markets have been beat up along with everyone else. Some might take longer to recover, while others may bounce back nicely. Be sure to have a strategy in place before jumping back into the market. The 50-day moving average is a good place to start, and moving incrementally instead of all at once will give you more control.

• PowerShares BLDRS Asia 50 ADR Index Fund (ADRA): down 51.3% year-to-date

• Vanguard European (VGK): down 49.8% year-to-date

At this meeting, European leaders will call for an overhaul of the global financial system within 100 days, hoping to influence President-Elect Barack Obama to jump on board and act quickly.  Other issues they hope to address include strenghtining the International Monetary Fund, reshaping finanical governance and imposing greater regulation on the sector, reports Stephen Castle for the New York Times.

Castle also reports that the 27 nations agreed that the monetary fund should become the “pivot of a renewed international system” and should coordinate more closely with the Financial Stability Forum, which aims to promote international financial stability through information exchange and cooperation in supervision and surveillance. 

The principles put forward by the Europeans on Friday include regulation, “or at least oversight,” of all financial institutions, accountability and transparency, new approaches to risk assessment and a central role for the monetary fund.

The world is excited about the new leadership in the United States, but the general thinking is that we’ll all have to be patient. Barack Obama himself has stated that it could take awhile to get the world’s economies back on track. He’s under immense pressure to produce results, but patience is going to be the order of the day.

On Friday, reaction to the meeting was positive, enabling the iShares S&P Europe 350 Index Fund (IEV) to gain 5.73% and the Vanguard European ETF (VGK) to gain 5.84 %. However, the funds are down 44.1% and 44.5% year-to-date, respectively.

Borrowing costs were left at 4.25% by the European Central Bank, while the Bank of England held its benchmark rate at 5%, reports Carter Dougherty for the New York Times. The ECB said it would have inflation under control by 2010, something many Europeans could be looking forward to.

The ECB expects euro zone growth to hit 1.4% this year, and 1.2% for 2009. Inflation is forecast to be 3.5% for this year and 2.6% for next year. Financial market turmoil is bubbling over into Europe, with housing market downturns, soaring commodity and energy prices affecting daily lives, and weak economic activity in many places.

When a recovery shows up, the Dow Jones Euro Stoxx (FEZ) fund might be a way to capitalize. The ETF is made up of an index that tracks 50 Eurozone companies, of which are market leaders within their sectors. To clarify, the Eurozone includes most countries in Western Europe except the United Kingdom. Some of the largest companies in Europe are included in this ETF.

While Germany and France make up around 64% of the portfolio, 32% of the entire fund is in the financials sector. The expense ratio is at 32% which is fair for the immense exposure. The assets are only at $279 million, reports David Hunkar for Seeking Alpha.

Europe and the Eurozone countries are feeling the side effects of the credit crisis, with a slower-than-expected growth outlook for the entire economy, according to the Organization for Economic Development.

Other diversified ways to get European exposure when the time is right:

• iShares MSCI EMU Index (EZU): down 24% year-to-date; France, 28.5%; Germany, 25.8%; Spain, 11.9%; Italy, 10.7%
• Vanguard European Stock (VGK): down 19.6% year-to-date; United Kingdom, 30.8%; France, 14.3%; Germany, 12.9%; Switzerland, 10.2%; Spain, 5.9%
• PowerShares FTSE RAFI Europe Portfolio (PEF): down 21.7% year-to-date; United Kingdom, 32.2%; France, 16.4%; Germany, 14.4%; Switzerland, 7.4%

Figures released in mid-August showed that the euro-zone economy shriveled to an annualized rate of 0.8% during the second quarter. It was the biggest reversal since 2001.

Purchasing and manufacturing data are reflecting this slump, consumer confidence is low, and business confidence within the three largest European economies – Germany, France and Italy – is lagging, reports The Economist. Germany’s downturn is causing particular dismay, since it was one of the few countries that sidestepped the global house-price boom.

In general, the sentiment for the global credit crunch is blamed on America. Many Europeans, Germans in particular, feel that they do not deserve this reversal of fortune, as they did not create this situation. But one economist says that Germany profited from the credit-fueled boom and were part of the game.

Elsewhere in Europe, housing mania took hold, but Ireland’s bust might be the most dramatic of all. Its GDP grew 6% in 2007, but is on pace to shrink this year.

Euro inflation fell to 3.8% in August from a record high of 4% in June and July, offering some glimmer of hope.

• Vanguard Europe Pacific ETF (VEA), down 16.8% year-to-date
• BLDRs Europe 100 ADR Index Fund (ADRU), down 17.7% year-to-date
• Vanguard European ETF (VGK), down 17.8% year-to-date
• PowerShares FTSE RAFI Europe Portfolio (PEF), down 20.8% year-to-date
• PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD), down 21.6% year-to-date

Exchange traded funds (ETFs) that hold European large-cap stocks include Vanguard European Stock (VGK) and the iShares S&P Europe 350 (IEV), both of which are down year-to-date, but have been ticking back up during the past four weeks.

VGK in the last month has risen 2.1%, but is down 3.1% year-to-date. IEV is up 1.7% in the last month, but down 3.4% year-to-date.

VGK is made up of bigger firms, while IEV is actually five years older. IEV holds 600 companies while VGK holds 348. The ETFs track different indexes, the MSCI Europe Index for IEV and the S&P Europe 350 Index for VGK.

Both ETFs give exposure to large, Western European companies and currencies, reports Joanne Von Alroth for Investor’s Business Daily. The large-caps that make up these funds have performed well recently.

But not all is rosy in Europe: the European Union is battling 3% inflation, a credit crisis and high food prices. Some retailers have seen sales fall. But there’s optimism, too, since in April both France and the United Kingdom saw their highest monthly benchmark index gains in nearly five years.