Traders appear to have brushed aside the mounting debt and deficit issues in Europe; but, be warned, these are not going away anytime soon. At least, that’s my opinion.
Earlier this week, Spain warned that it may receive a credit rating downgrade, which followed a similar warning from Belgium on Tuesday.
The news is not surprising and clearly points to the debt obstacles clouding Europe and the world, as the global economies are interconnected.
The problem here is that Spain is a major cog in the European economic wheel. The country is the world’s ninth largest economy, so any major jitters here could easily have a domino effect to other European countries and major trading partners in Asia and elsewhere.
Yes, Ireland will receive a bailout worth about $130 billion—it will clearly put the country in a vulnerable position for years to come. The same goes for Greece. The reality is that these countries receiving massive capital infusion will need to cut expenditures and this cannot help, especially when these countries and Europe are caught with flat growth.
The real problem I see is in the 27-member European Union (EU). The EU is a critical part of the global economies given its over 500 million people, accounting for about 28% of the world’s gross world product in 2009, according to data from the International Monetary Fund (IMF). Problems in the EU can and will likely spread to other economies in Asia, Latin America, and North America. The EU is critical to the global economic recovery. Greece started the whole bailout program that led to the establishment of a trillion-dollar austerity program aimed at helping out countries in financial distress.
As I have said, the trillion-dollar austerity program will likely negatively impact economic growth in this vital region.
The last thing the EU wants is for the weaker members to drag down the member group, especially at a time when the countries are trying to rebound from the global recession.
Europe is estimated to remain sluggish in 2010 and 2011. The comparative growth rates support my concerns. In Germany, GDP growth in 2010 is pegged at a weak 1.5% albeit it is a nice reversal from a five-percent decline in 2009. Growth in 2011 is even lower at 1.4%. In comparison, the U.S. economy is predicted to grow 2.8% this year and moderate to 2.4% in 2011.
The Organization for Economic Cooperation and Development (OECD) reported that the world’s rich economies would slow in the first half of 2010, but it expects growth in the U.S. and Japan to exceed that of Europe. I feel that Europe may continue to underperform the global markets in 2010 and 2011.
My advice to you is to not be overly focused on the domestic issue. You need to seriously monitor the debt situation in Europe. There have been some positive earnings news from European firms and sentiment in the Eurozone has been encouraging, but we need to see this reflected in the region’s growth.
And while you are at it, please don’t forget China, as the government there reins in growth that would likely impact other global economies. The significance of China is critical to the condition of the global economies and recovery. Consider this: according to the IMF, for each percentage point China grows, it adds about 0.4% of growth to the world economies.