Why Eurozone’s Problems Are Headed for America
It’s more of the same overseas in Europe. When you have 17 different countries with their own political and economic systems come together to form the eurozone, you know there will be problems. The concept of the euro makes sense—to allow the seamless flow of goods and services through this region of 500 million people. Unfortunately, it has not been smooth sailing since the beginning of the euro in 1999. About six of the eurozone’s member countries are in a recession.
The problem is that the global economy is so interconnected that problems in the eurozone will impact economies around the world, including the United States and China.
We saw the fiasco with Greece, as the poor country with massive debt problems had to ask for two separate tranches of emergency loans just to stay afloat and avoid a default.
Then there’s Spain, an equally beautiful country like Greece, but one that’s also struggling in light of massive unemployment (26% in the fourth quarter), pressured by massive debt overload. Spain has yet to receive emergency capital, but the country’s banks were forced to take some funding. The risk with Spain is that it’s the 12th-largest economy in the world, so failure here would be disastrous. The country is in the midst of a double-dip recession with gross domestic product (GDP) growth estimated to contract 1.3% in 2013, down from the previous 1.8% growth, according to the International Monetary Fund (IMF). (Read why I feel Spain is in trouble in “Spain Is Delusional Believing Everything Is Okay.”)
And now we have Italy, the third-largest country in the eurozone, which just finished its national election with a hung parliament. The problem is that the lack of leadership and political stability in Italy comes at a critical time, when the country must deal with its massive national debt and low growth. The concern is that problems in Italy would cause more havoc.
The eurozone financial crisis is still around; the market just pushed it aside for the election, fiscal cliff, and earnings, but the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -23.6 in December, according to the European Commission. The media is stressing how the numbers have improved from the -26.5 in December; I’m not sure about you, but I think the reading is still awful.
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At the same time, a major issue is the super high unemployment rate encompassing the eurozone. In the region, unemployment was 11.8%, or about 18.8 million people, in November—the highest number since the beginning of the eurozone in 1999. (Source: Melvin, D., “U unemployment tops 26 million for 1st time,” Associated Press, January 8, 2013, last accessed February 28, 2013.)
Add in the massive debt loans and pressure to cut spending, and you’ll realize why I continue to be deeply concerned.
Of course, the mess in the weaker eurozone countries is driving down growth in France and Germany, the two pillars holding up the eurozone. France is finding things are getting more difficult, as the eurozone tries to dig itself out of its financial mess. Capital Economics suggests France and Germany may face another recession in 2013.
So as an investor, I would avoid Europe; but you also need to watch how the financial mess in the eurozone impacts other key global economies, including China and the United States.