Two Major Eurozone Countries to Fall Back into Recession in 2012

Two big eurozone countries are headed back to recession this year.

Spain, the eurozone’s fourth largest economy, will fall back into recession in early 2012, according to a statement made by its Economy Minister.Spainhas the highest unemployment rate in the eurozone at a staggering 21.5%.Spainand its citizens are in real trouble.

Italy, the third largest eurozone economy, will also be technically in a recession in the first half of 2012. Italian consumer confidence sits at its lowest level in 16 years. We can see this in retail sales, which were at a 10-year low this holiday season (source: Codacons web site).Italyand its citizens are in real trouble.

Dear reader, I’m sure you’ve heard enough about woes in the eurozone in 2011. But here’s why it’s important to us here inNorth America:

Firstly,ItalyandSpainare respectively the third and fourth largest economies in the eurozone. These economies cannot fall back into recession without affecting the other 17 member countries. The biggest risk (a country that could fall back into recession as well) I believe is France, the second largest eurozone member.

Secondly, banks in the United Stateshave major exposure to eurozone countries. Hence, the risks that weak, or defaulting, eurozone countries represent are high for large American banks. Between the eurozone exposure andU.S. residential real estate bust, it’s no wonder to me that the stock prices of big American banks have yet to recover.

Thirdly, while there has been plenty of talk regarding fixing the eurozone countries with the largest debt exposure, there has been no execution.Germanycontinues to balk at idea of the European Central Bank (ECB) printing more money. (Our central bank; they wouldn’t think twice about printing more money to save the economy.)

Finally, both Spain and Italy have introduced severe austerity measures. New Italian Prime Minister Mario Monti was able to secure final passage on austerity measures that will put a tax on luxury goods (Italy is well-known for high-end luxury good items), increase gas prices, and create a new tax on primary residences. Sure, the austerity measures bring down government debt, but they also stifle consumer spending further.

The year 2012 will be a very difficult one for the eurozone. Please don’t think for a moment that: 1) it won’t affect the west and; 2) the same thing couldn’t happen here.

Where the Market Stands; Where it’s Headed:

We are entering 2012 fully entrenched in a bear market rally that started in March of 2009. I will be the first to admit: I didn’t believe the bear market rally would last so long. The government and the Fed have fought this bear market “tooth and nail,” extending the rally.

Shortly, the Obama administration will ask Congress to increase the federal government borrowing ceiling by another $1.2 trillion, at which point the government debt ceiling will be raised to $16.4 trillion. The Fed; it’s on track to keep interest rates near zero for five years while having expanded the money supply by trillions of dollars.

Sure, what I described in the above paragraph will eventually come back to haunt us. But, in the meantime, it will keep the bear market rally moving higher. (See also: Exactly Where We Are in This Secular Bear Market.)

What He Said:

“If the U.S.housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.