Don’t Jump on the European Bandwagon Yet

austerity measuresIn the recent months, we have been able to shift our focus away from the eurozone and concentrate on the economic renewal in the U.S. Yet, as I have been saying, you cannot forget the risk in the eurozone and Europe. GDP growth in the eurozone is muted and the heavy debt loads have destroyed Greece, which had to receive two rounds of emergency capital in excess of $330 billion in order to stay afloat and avoid a financial Armageddon.

Greece will face decades of hardship. It will be very difficult for Greece to expand and grow its extremely fragile economy. The austerity measures are not popular and will wreak havoc. It could be decades before the country can emerge out of its crisis mode. Take a look at Japan, which has been caught in its mini recessions and stagnant growth for over 20 years, as I discussed in China & India vs. Japan: The Best Place to Put Your Capital.

With Europe and the eurozone still trying to find their legs and struggling to grow, I firmly believe there will be more issues down the road and likely sooner than later.

Spanish bond yields are rising again at over six percent. The feeling is that bond yields of over seven percent are dangerous and represent a red flag. Investors demand higher yields to compensate for the added risk of investing in countries such as Spain. Just think back to Greece where the bond yields at one point were above 90%! And take a look at what happened as the country was allowed to move into a controlled default and investors holding the bonds had no choice but to absorb a loss of about 75% on their investments.

On Tuesday morning, the International Monetary Fund (IMF) came out and said it was more optimistic about the global economies and pleased with the broad measures to deal with the debt issues in Europe and the eurozone. The IMF pegged U.S. GDP growth at 2.1% this year, which is okay but nothing to get excited about.Europe is estimated to see its economy contract by 0.3%. The one thing I can agree with is the IMF’s assessment that the eurozone debt crisis will be the most significant risk to the global economies.

You only have to take a look at China to see the negative impact of a slower Europe and eurozone on the massive idling manufacturing facilities in China, which is facing slowing.

And then you still have the risk in Portugal, Ireland, Italy and Spain. These countries are not on solid ground.Portugal and Ireland have already received handouts and will likely ask for more funds if Europe stalls. Italy is also sitting on a massive mountain of debt.

But the carnage is not confined to these countries. The two biggest countries in the eurozone, Germany and France, are also facing their own difficulties.

So, while traders are focused on the economic renewal and job creation in the U.S., the eurozone region remains a high risk area vulnerable to continued stalling. Before the global economies move into sustained recovery, the eurozone must expand and rebound. Even if the U.S. economy strengthens, we need to see demand growth out of Europe in order to feel more confident in the sustainability of growth in the U.S. and elsewhere.