When Germany recently announced some underachieving economic numbers, it was a red flag for the eurozone and Europe. When the stronger of the two pillars in the eurozone (France being the other pillar) begins to show some fragility, you have to take a step back to evaluate the situation.
Now, it shouldn’t be a complete surprise to you that there are growth issues brewing in the eurozone, especially given the economic sanctions placed upon Russia and the country’s reluctant leader, President Vladimir Putin. There is little evidence Putin wants to resolve the situation with Ukraine anytime soon, so we could see the negative impact on the rest of Europe and the eurozone rise.
Russia is working on increasing its ties to China, which needs energy and other raw materials.
Recently, the news surfaced from the European Commission that gross domestic product (GDP) growth in the eurozone will slow to a mere 0.8% this year, followed by an equally disappointing 1.1% in 2015.
Even more concerning is the fact that inflation in the eurozone is estimated at only 0.8% next year. This means consumers are not spending on goods and services, a key component of GDP growth. When the demand is low, prices don’t tend to move higher, which is reflected in the rate of inflation.
The stalling in the eurozone is troubling, and it is the reason why the benchmark rate in the region is only at 0.5%, as set by the European Central Bank.
In addition, the slowing in China is also having a clear impact on the demand for European goods.
While I doubt the eurozone will sink into another recession, times will not be easy. Weak countries will continue to suck money from the stronger countries, and debt levels in the region are high, especially in the PIIGS region (Portugal, Ireland, Italy, Greece, and Spain).
When countries are straddled with massive overhanging debt levels, it means high interest costs and the inability to spend freely—both of which don’t help when you are aiming for growth. This is the issue that continues to plague the eurozone, and it could cause economic stalling in the region for years.
And we can’t forget the extremely high unemployment rate, which is in the double-digits for the eurozone. A high unemployment rate translates into lower consumer confidence and spending, which in turn impacts GDP.
The reality is that things really could get worse in the eurozone before they get better.
To play this weakness in Europe, investors may consider taking a look at put options on some of the European-focused exchange-traded funds (ETFs), such as iShares Europe (NYSEArca/IEV) or iShares MSCI EMU (NYSEArca/EZU).