While the European Union deals with austerity measures and debt relief for Greece, Ireland, and Portugal, the region has not been able to focus on turning its economic engine around.
Germany, the top country in the European Union, managed only a tiny 0.1% rise in its second-quarter gross domestic product (GDP). The results followed on the heels of disappointing flat results from France, another key European country. The reason you should be concerned is that Germany and France are the two strongest countries in the European Union and the eurozone, so weak growth here is bearish. For instance, Germany exports nearly two-thirds of its products to the European Union and around 40% to the eurozone, so the slowing in the other countries will impact Germany, as evidenced by the recent GDP reading.
The eurozone grew at a flat 0.2% in the second quarter, well below the 0.8% pace in the first quarter. The current focus on resolving the massive debt issues with the PIGS (Portugal, Ireland, Greece, and Spain) has clearly taken away from the focus on economic expansion.
In addition, the strengthening of the euro versus the U.S. dollar since June 2010 has not helped the European export sector.
Now in Europe, there is not only the issue of debt, but growth is also a significant problem.
According to the World Bank, real GDP growth in Europe is estimated at 1.4% in 2011 and 2.0% in 2012, but it’s looking like the estimates may be overly optimistic.
The trouble in the eurozone is far from over and may in fact be just beginning. In the worst-case scenario, it could spread like wildfire across to other regions in Europe.
The yields are rising in debt instruments in Spain and Italy due to the higher risk. But, unlike Greece, Ireland, and Portugal, my concern is that, since Spain and Italy are the third and fourth largest economies in the eurozone, problems there could be devastating for not only the rest of Europe, but also globally, in Asia and the United States.
My economic analysis is straightforward. The reality is that, without renewal in Europe and other foreign markets; we cannot expect a sustainable recovery.
The problem is that the big countries such as Germany and France are supporting the weaker members that cannot survive on their own at this time without capital infusion. This is not good and it will hamper growth in Europe. The trillion-dollar austerity measures will take away from investment in the countries’ growth and economic renewal.
I feel that Europe will continue to underperform the global markets in 2011 and 2012. I would not be parking my capital in Europe in the immediate future.