On January 1, 1999, 11 European countries came together in an attempt to form an economic and monetary powerhouse. Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain were the first members of the eurozone.
Today, 17 of the 27 members of the European Union (EU) are part of the eurozone, the name for the collection of EU countries that utilize the euro. Over the last decade, the euro has become one of the world’s most powerful currencies, used by more than 320 million Europeans in twenty-three countries.
In 2011, the United States exported $268 billion in goods to the eurozone and imported $368 billion, making it the America’s biggest trading partner. According to S&P 500 data, roughly 14% of all S&P 500 company sales come from Europe. Not surprisingly, economic deterioration in the eurozone would have serious implications for the U.S. (Source: “Trade in Goods with European Union,” United States Census Bureau web site, last accessed December 19, 2012.)
The European debt crisis cannot be laid solely at the feet of the U.S. financial crisis. There was a build-up of debts in Spain and Italy before 2008, but it had little or nothing to do with governments. The private sector—companies and mortgage borrowers—were taking out huge loans. When southern European countries joined the eurozone, interest rates fell to unprecedented lows, fuelling a debt-laden boom.
That said, the European debt crisis became critical after the U.S. financial crisis of 2008–2009, as the slowing global economy exposed unsustainable financial policies of certain eurozone countries. In October 2009, Greece’s new government admitted the budget deficit would be double the previous estimate and would hit 12% gross domestic product (GDP). After years of uncontrolled spending and non-existent fiscal reforms, Greece was one of the first countries to buckle under the economic strain.
Fast-forward to the present, and the European debt crisis is pushing the 17-country eurozone toward recession, helping drag down the global economy. Ten European countries have already slipped into a recession. Three more have needed to be bailed out in order to avoid default.
In Spain, where the unemployment rate is 25%, there have been general strikes and civil unrest. In France, the European Central Bank (ECB) injected more than a trillion dollars to rescue three of the country’s largest financial institutions. Seven European countries have changed leadership because of the crisis, and Greece reneged on $133 billion in debts.
The chance of an economic recovery for the eurozone has been fading. With huge question marks looming over the health of some of the region’s biggest economies, a near-term rebound for the eurozone seems very unlikely. That may have to wait until 2014, maybe even later.
While Germany and France, the two largest eurozone countries, are expected to avoid recession, the euro will need to weaken in value for southern European nations to eliminate their current deficits and cut reliance on foreign borrowing, or to export enough to return to growth.
The multiple sovereign debt crises of European countries have placed pressure on the euro currency. With general high unemployment rates and anemic GDP growth, avoiding a recession doesn’t look likely.
Long term, we do not believe the euro will survive. We believe that Germany, the sole growth engine of Europe, made a mistake in joining the euro currency. And, at some point, we expect Germany to either withdraw from the 17-country eurozone or simply ask the weaker European countries to leave the euro currency.
For Americans, the struggles of Germany and the eurozone are a constant reminder of the interconnectedness of the global economy. What happens with the euro will have a profound affect on the value of the U.S. dollar and the price of gold bullion. You can find regular commentary on the euro in Profit Confidential.
The real problem for the euro is the lack of leadership—in banking and politics—in the region. There is no flexibility in the euro currency to help those countries in need.
The failure of decisive action in the eurozone is pronounced, but it is too difficult. There is no unified political, financial, or regulatory leadership. So how can the euro work?
No situation is the same, but Sweden experienced a real estate crash and credit crunch in the early 1990s—the worst since the 1930s.
According to Bo Lundgren, known as Sweden’s “Mr. Fix-It,” here’s what Sweden did after a period of financial disbelief:
1. Sweden unified politically.
2. The government immediately guaranteed all cash deposits at all banks. Two banks (out of more than 100) were nationalized, and they had to give common stock to the government, which was later sold.
3. There was restructuring, the closure of tax loopholes, spending austerity, and a currency devaluation of 25%.
Currency devaluation is the very thing that struggling eurozone countries cannot do. The “Swedish Solution” was not perfect, but at the very least, it was decisive action. After several tough years, Sweden was back on the growth path.
Getting in front of sovereign debt is now critical.
Every quarter or so, there’s a shock in capital markets regarding the sovereign debt and banking crises in the eurozone. Then there are patchwork remedies and more sovereign debt.
Today, … Read More
Mark my words: the eurozone’s economic problems are here to stay, and the economic slowdown in the common currency region will get worse as we move forward.
The Netherlands, the fifth-biggest nation in the eurozone, is the new victim. The country, once looked upon as one of the strongest in the eurozone, is experiencing a collapse in its real estate market.
The Dutch economy has the most debt amongst its eurozone peers—banks have 650 billion euros worth of mortgage loans on their books, while consumer debt has hit an alarming 250% of income. (Source: Spiegel, March 4, 2013.) To give you some idea of the magnitude of that consumer debt level, in Spain, the ratio of debt-to-income reached 125% in 2011, the year Spain started to really have financial problems.
The official unemployment rate in the Netherlands just hit 7.7%, and 755 companies in the country declared bankruptcy in February—the highest monthly number of bankruptcies since 1981! The CPB Netherlands Bureau for Economic Policy Analysis now expects a decline of 0.5% in the country’s gross domestic product (GDP) this year.
We already know Greece is in a state of depression, and the economic slowdown in Spain, Italy, and Portugal is accelerating.
France, the second-biggest economic hub in the eurozone, is facing a staggering unemployment rate above 10%.
Similarly, Germany, the largest economy in the eurozone, is experiencing an economic slowdown, as well. The Markit Eurozone Composite Purchasing Managers’ Index (PMI) reports Germany’s all-sector output fell in March for the 19th consecutive month and March saw the largest drop in orders in three months. (Source: Markit, April 4, … Read More
While the “official” numbers may not show it, inflation in the U.S. economy is a major problem, and it’s hurting any chance we may have of real economic growth.
The Bureau of Labor Statistics says inflation in the U.S. economy has caused prices to increase by only 12% since 2007—what $1.00 could buy in 2007 costs $1.12 today. (Source: Bureau of Labor Statistics web site, last accessed April 5, 2013.) As my readers know, I believe these inflation numbers are materially understated.
In February, the U.S. Producer Price Index (PPI), what many economists consider to be an early signal of where inflation might be headed, posted the highest month-over-month rate of change since October 2012. The PPI rose 0.7% in February from January. (Bureau of Labor Statistics, last accessed April 5, 2013.) Using February’s number as a base, the PPI is rising at an annual rate of 8.4%.
Corn futures at the beginning of 2007 were priced around $350.00 per lot. Now the same future costs $630.00 each—an increase of 80% in the last five years. As corn is an ingredient in a significant number of different foods, general food prices have also increased.
But despite the inflation we are experiencing, Americans’ wages aren’t rising. In the first quarter of 2007, the average hourly earnings of all private-sector employees in the U.S. economy was $20.70 per hour. In the first quarter of 2013, it increased to $23.80 an hour—a six-year increase of less than 15% (source: Federal Reserve Bank of St. Louis web site, last accessed April 5, 2013); not enough to keep up with inflation.
Adding more to the … Read More
If you go to Europe and you find yourself in Holland (the Netherlands), you’ll likely fly through Schiphol Airport on the edge of Amsterdam. It’s one of the best airports in the world, in my humble opinion. When you go through security, you are treated like a paying customer—which you are. The euro currency has become a lot more affordable for obvious reasons.
I visited Europe and Holland, specifically, in 2011 to visit my great-uncle’s war grave at the Begraafplaats Crooswijk cemetery in Rotterdam. It is a strikingly beautiful cemetery. The Dutch do a masterful job of maintaining war graves. Thank you.
My trip was subsidized by an old college buddy who has a huge (for Europe) apartment in Amsterdam. It’s the best location in town. In his job, he is the second-most powerful person on ING Group’s trading floor. He is the information technology (IT) guy.
Amsterdam is one of the most unique cities I’ve ever been to (ahem, not for those reasons). It is one of Europe’s top destinations (perhaps for those reasons). It boasts stunning architecture and is home to the world’s oldest stock exchange. The NYSE Euronext N.V. is Amsterdam’s stock exchange today.
Amsterdam was the financial center of the world a long time ago, centuries before the euro. Apparently, the Dutch East India Company was the first multinational corporation and the Bank of Amsterdam was the first central bank. It financed the company in guilders, which eventually joined in creating the euro currency. The city is still a financial center in Europe, but history keeps repeating itself.
Like many banks in Europe, ING … Read More
There was another reminder on Monday morning that the eurozone continues to be in a financial mess. In an unprecedented move, Cyprus plans to tax bank deposits at 6.75% and 9.9% to raise US$7.6 billion in capital as part of the country’s bailout deal. (Source: Steinhauser, G., Stevis, M., and Walker, M., “Cyprus Rescue Risks Backlash,” Wall Street Journal March 18, 2013.)
But what is alarming is the proposed tax would apply to all deposits, regardless of size, and in my view, this cannot be good. For the stock market, the news is renewing fears the eurozone may be set for another potential financial backlash. Investment bank Nomura suggests the tax move could result in the Cyprus economy contracting 15% over the next two years.
What the move indicates is that there are clearly financial issues in the eurozone, which I feel traders have largely pushed aside here for the recent stock market rally.
When you have 17 different countries with their own political and economic systems come together to form the eurozone, you know there will be problems. Unfortunately, it has not been smooth sailing since the beginning of the euro in 1999. The region is in a recession.
As I have discussed in the past, the problem is that the global economy is so interconnected now that problems in the eurozone will impact economies around the world, including the United States and China.
The reality is that the eurozone financial crisis is still around, and the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -23.6 in February, according to … Read More
Profit Confidential — IT'S FREE!
"A Golden Opportunity for Stock Market Investors"