In 2014, I was able to travel to Europe on six different occasions. I just came back from England. These trips to Europe enable me to see how the countries there are faring economically. And I can tell you first-hand—take England and Germany out of the picture, and most European countries are in an outright depression. (Not good news for the U.S. economy, but more on why it will impact America and you, an American investor, in a moment.)
For Italy, Spain, and Portugal, despite the European Central Bank (ECB) imposing negative interest rates on deposits and the lowering of its benchmark interest rate, nothing much has changed for these countries economically…and the social picture is now deteriorating.
There’s increasing belief that the ECB will go through with quantitative easing (print money to buy bonds), but I doubt this exercise will change the economic picture in the eurozone.
Italy and Spain in Depression?
In October, Italy, the third-biggest country in the eurozone, saw bad debts on the books of its banks increase 19% compared to October of last year. (Source: Bloomberg, December 10, 2014.) Italy is going through one of the worst recessions (or should I say depressions) since World War II. And there is no light at the end of the tunnel for Italy.
Spain, the fourth-biggest nation in the region, is suffering, too. The abolishment of a law regarding rent control on January 1 could cause 55,000 businesses to close down this year, resulting in about 120,000 jobs lost. (Source: Financial Post, January 1, 2014.) Sadly, this is happening at a time when Spain’s unemployment is severe—one in four people are out of work in Spain.
Greece’s Exit to Finish Off Weak Euro
While problems in Italy and Spain are something to keep an eye on, there’s an ongoing story that shouldn’t be forgotten: Greece.
According to a report from Der Spiegel, a German weekly news magazine, Germany’s government believes that the exit of Greece from the eurozone is unavoidable if the left-wing Syriza party wins. As per recent polls, this political party is gaining strength. (Source: Reuters, January 4, 2014.)
If Greece exits from the eurozone, there will be consequences. Citing a study from 2012 by Bertelsmann Stiftung, if Greece leaves the eurozone, a total of 42 hubs in the global economy will incur losses of 674 billion euros (about USD$800 billion) through to 2020. (Source: Bertelsmann Stiftung, October 17, 2012.)
And if Greece is able to leave the eurozone, it will open the door to other troubled nations wanting to do the same—debasing the already fragile euro.
If we assume countries like Spain, Portugal, and Italy leave the eurozone, the losses for the global economy will be huge. If these three countries choose this route, going back to the study, the U.S. economy alone will be exposed to losses of 2.8 trillion euros (about USD$3.3 trillion) through 2020.
As I have told my readers over and over again, the eurozone troubles are serious and will have ramifications for us here in America, as a significant number of U.S. companies do business in the eurozone.
With about half the S&P 500 companies deriving revenues from outside the U.S. (the eurozone their biggest market aside from America), economic troubles in the eurozone will push down revenue at American companies and their profitability will suffer, resulting in lower stock prices.
Saying the very least, for 2015, investors should add the economic problems in the eurozone to the list of risks that could send key stock indices like the Dow Jones Industrial Average and the S&P 500 crumbling.