With the sovereign debt crisis in Greece reaching new heights and the threat of contagion raising ugly reminders of the U.S. financial crisis three years ago, investors have run away from European investments faster than a BMW driving down the Autobahn. Increasingly, hopes that the European Central Bank and the stronger economies of the eurozone might reach some consensus on reforming the ailing credit markets on the continent are fading as regional bickering takes precedence over concrete solutions.

In fact, some investors who are eager for a chance to profit from a European financial crisis are salivating at the idea of selling Europe short. But before you make a big bet on Europe's downfall, you should take a step back and look at all the ways in which things could go dramatically wrong with such a move.

The dangerous world of currency investing
Just last week, I asked the question of whether the U.S. dollar had finally hit bottom. With Europe's governments at an impasse on how to deal with Greece and other weak eurozone economies, the euro has already lost a lot of ground against the dollar.

The simple rule of the past several years is that if you want to make a bet on something, there's an exchange-traded fund that will make it easy for you. Shorting the euro is no exception, as you have a couple of choices. Selling shares of the CurrencyShares Euro Trust (NYS: FXE) short would help you profit from a downward move in the euro, and buying the inverse levered ETF ProShares UltraShort Euro (NYS: EUO) could potentially give you even more profits -- albeit with the added risk that levered ETFs bring.

But before you think your currency bet is a sure thing, remember what happened with the Swiss franc earlier this month. Until recently, investors saw Switzerland's currency as a much safer haven than the dollar, due in part to it's the country's budget surpluses, low unemployment, above-average economic growth, and low levels of government debt. Investors piled into franc investments like CurrencyShares Swiss Franc (NYS: FXF) .

Then, the Swiss National Bank pulled the rug out from under investors, announcing several measures, including a currency peg between the franc and the euro, that resulted in a drop of about 20% from the franc's recent highs. In other words, despite the franc's obvious strength against the euro, investors suffered dramatic losses because the governments involved saw the continued stability of the eurozone as a more important policy goal than preserving their own financial superiority. That could easily happen in the U.S. as well, with competitive devaluation continuing and short-euro bets backfiring -- not to mention the potential bloodbath shorts could suffer if Europe actually manages to solve its problems.

Venturing into stocks
In many ways, those betting against European stocks are taking on even more risk. In order for shares of European companies to take hits, not only does Europe need to continue struggling economically, but the size of those home-market hits for multinationals has to outweigh the benefits of a weaker euro for their international business.

For many companies, that simply doesn't seem likely. For international giants like SAP (NYS: SAP) , which gets more than half its revenue from outside Europe, and Siemens (NYS: SI) , for which Europe accounts for around 60% of sales, a euro crisis would hurt but not be fatal. Moreover, because these companies have concentrations in the stronger parts of the eurozone, such as Germany, they might actually benefit in the long run from cutting out the weaker countries from the common currency scheme. Similarly, even companies like Spain's Telefonica (NYS: TEF) and Italy's Luxottica (NYS: LUX) have enough presence beyond their home markets that they shouldn't collapse even if Greek problems spread to the Spanish and Italian economies.

Profit from panic
When investors run away from an entire region, they inevitably throw out the baby with the bathwater. By searching for the investments that are wrongly associated with a stampede away from an entire stock market, you can pick up some great bargains that stand a great chance of eventually paying off.

Currency ETFs may not be the safest way to play international markets, but that doesn't mean you can't find profitable investments. Read the Fool's free special report on ETFs to get the name of one smart international play that capitalizes on emerging markets for big profits.

At the time this article was published Fool contributor Dan Caplinger wants Europe to get cheaper. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Telefonica. Motley Fool newsletter services have recommended creating a bear put spread position in CurrencyShares Euro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy travels the world with you.

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