Europe & Its Economy: Tough Years Ahead
Thursday, October 13th, 2011
By George Leong, B.Comm. for Profit Confidential
If you based the prospects for Europe on the euro, you can see by the chart of the euro that optimism has improved since hitting a low in March 2010. However, the current debt crisis has killed the rally, as the euro has broken below its upward trendline.
The 17 members of the eurozone are scrambling to save Greece by expanding its eurozone rescue fund. So far, 16 of the 17 members have approved the revised plan, leaving only Slovakia as yet to approve the change. But this “no” vote doesn’t appear to be an issue, as expectations are that Slovakia will come to the table and agree before the European Union Leaders summit on October 23. The eurozone’s two biggest members, Germany and France, have said they are committed to resolving the debt crisis in Europe.
And to try to safeguard the fragile European banking system, there is talk that banks in Europe should be forced to temporarily increase their capital reserves just in case the region’s debt crisis worsens. European banks should not be allowed to pay out dividends or bonuses until the capital reserves are upped, said José Manuel Barroso, the president of the European Commission. The fear is that a deepened debt crisis could batter the European banking system similar to what happened in the United States, which would not be good.
Barroso is also asking for the launch of a permanent bailout fund—the European Stability Mechanism—to begin in mid-2012. The plan is that private investors in government bonds should absorb any losses when the country needs to write off some of its debt. I’m just not sure how this would work, but clearly the yields offered would need to be big enough to compensate for the added debt risk taken.
I continue to feel that Europe is in deep trouble, which could take years to dig itself out of. Greece is in deep despair and the situation there could easily worsen.
The reality is that growth in both Germany and France has suffered with the focus squarely on saving the PIGS (Portugal, Ireland, Greece, and Spain).
My global economic analysis is that the debt, deficit, and stalling growth issues cannot continue much longer or Europe will falter and fall into a deeper or new recession. Greece remains in a deep recession. The PIGS are also struggling to survive and turn around.
The European Central Bank (ECB) has maintained its benchmark lending rates at 1.50, but also cut its gross domestic product (GDP) growth forecast for the region.
Morgan Stanley cut its global GDP forecast for 2011 and 2012 and added that the eurozone was “dangerously close to a recession.”
So now we wait for Europe to sort out its mess and this will take a long time. The problem is that the fragile European situation also impacts America, which is in its own big mess.