Eurozone Weakness: Don’t Take It Lightly!

debt crisisEurope is an ocean away, but it’s literally in our backyard as far as the impact from its credit crisis and it doesn’t appear to be going away anytime soon.

Greece can’t even elect a coalition government to deal with the tough austerity measures that the previous government agreed to in order to receive a second tranche of emergency funds. Another election is set for June 17, 2012, to try to form a government. Failure to do so or to meet on the budget requirements could see Greece drop out of the eurozone. And, in spite of what some are saying, the G8 leaders don’t want Greece to exit the eurozone.

Then there’s the reality. Greece is a weak player balancing on a tightrope and it will likely take decades for the country to emerge from its mess, but even this is not guarantee. In fact, the situation in Greece could worsen if the tough austerity programs fail to deliver debt cuts and cost control. Germany, which is fighting its own gross domestic product (GDP) growth issues, is not interested in funding anymore money to Greece and wants to focus on its own economy.

The same goes for France. The wine may be great here, but the growth is a bit shaky.

And then there’s Spain with its rising bond yields. The 10-year auction yields fell to 6.16% as of May 22 on optimism towards additional help for the eurozone. The high yield places pressure on Spain in financing and is not sustainable given the country’s troubled debt and muted growth. The high yields are an indication of potential problems down the road. And also consider that about 24.4% of Spaniards will be out of work in the first quarter. Compare that to the 8.1% in the U.S. and it shows the extent of the problems in Spain. The youth unemployment rate in Spain stands at around a massive 51%, versus 16.4% in the U.S.

So worrisome is the fragility in the eurozone that the Organization for Economic Cooperation and Development (OECD) suggested that the eurozone could be heading for a “severe recession” with potential contraction of two percent this year. In the best case scenario, the eurozone could contract 0.1% this year and rebound a muted 0.9% in 2013.

The OECD said the governments and the European Central Bank (ECB) must take action immediately and help to avert a crisis in the eurozone, Europe, and the global economies.

The significance is evident, as we are seeing the negative impact on China’s economy and Asia. Japan, China’s island neighbor to the east, saw Fitch cut its long-term foreign currency rating to “A+” from “AA” and its local currency ratings to “A+” from

“AA-” due to negative outlook. I’m not positive on Japan, which I discussed in China & India vs. Japan: The Best Place to Put Your Capital.

The eurozone situation needs to be closely monitored and cannot be ignored. Another crisis in the region will hurt growth in the other world economies.