When we asked our readers what they enjoy reading the most on Profit Confidential, less than 10% of them said they like to read about the eurozone. We understand it’s not a topic of interest with the majority of our readers, but I can’t stress enough that what’s happening in the eurozone right now is very critical to the U.S. economy.
American-based companies have massive operations in the eurozone and generate significant portions of their sales from the region. American companies are already struggling to post revenue gains in 2014. If the economic slowdown in the eurozone continues, American companies’ revenues will be pressured further, and that means lower corporate earnings.
While giving its 2014 outlook during it first-quarter earnings release, Caterpillar Inc. (NYSE/CAT) said, “The Eurozone economy is recovering but is far from healthy. The ongoing decline in business lending, slowing inflation and recent strengthening in the euro are all concerns. The unwillingness of the ECB to take more aggressive actions risks leaving the economy struggling for years. Continued weak growth would make it difficult for businesses to maintain existing operations, let alone make new investments.” (Source: “Caterpillar Reports Higher First-Quarter Profit Per Share and Raises its 2014 Profit Outlook,” Caterpillar Inc. web site, April 24, 2014.)
But when you listen to the mainstream media, they are saying the opposite of Caterpillar; they are saying the economic slowdown in the eurozone is over. I think they are completely wrong.
And the situation with “bad debt”—the reason the eurozone got into trouble in the first place—is getting worse, not better, as debt-infested countries like Spain and Italy are seeing their bad debt increase.
Italy’s bad loans amounted to 164.6 billion euros in March compared to 162 billion euros a month earlier. As a portion of total loans outstanding at the Italian banks, bad loans amount to 8.6%—the highest level since November of 1998. (Source: Reuters, May 20, 2014.)
All the bad loans in Italy are keeping banks away from lending more. In fact, according to the Italian Banking Association, lending by Italian banks declined for the 24th straight month in April. Loans to families declined 2.2% in April after declining 2.1% in March.
Spain, the fourth-largest economic hub in the region, is experiencing similar conditions. Bad debt compared to total debt was 13.4% in March. Lending in the country declined as well. (Source: Reuters, May 19, 2014.)
Bad debt is just one problem for the eurozone; the economic slowdown in the region continues to take its toll. France’s unemployment is severely high, and its growth is next to nothing.
The eurozone crisis is far from over. When we hear statistics like the ones I’ve just mentioned above, it becomes more evident to me that the European Central Bank (ECB) will eventually be forced to follow the same path as the Federal Reserve and the Bank of Japan—print more money to keep the economy going.