There was another reminder on Monday morning that the eurozone continues to be in a financial mess. In an unprecedented move, Cyprus plans to tax bank deposits at 6.75% and 9.9% to raise US$7.6 billion in capital as part of the country’s bailout deal. (Source: Steinhauser, G., Stevis, M., and Walker, M., “Cyprus Rescue Risks Backlash,” Wall Street Journal March 18, 2013.)
But what is alarming is the proposed tax would apply to all deposits, regardless of size, and in my view, this cannot be good. For the stock market, the news is renewing fears the eurozone may be set for another potential financial backlash. Investment bank Nomura suggests the tax move could result in the Cyprus economy contracting 15% over the next two years.
What the move indicates is that there are clearly financial issues in the eurozone, which I feel traders have largely pushed aside here for the recent stock market rally.
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. Unfortunately, it has not been smooth sailing since the beginning of the euro in 1999. The region is in a recession.
As I have discussed in the past, the problem is that the global economy is so interconnected now that problems in the eurozone will impact economies around the world, including the United States and China.
The reality is that the eurozone financial crisis is still around, and the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -23.6 in February, according to the European Commission. The media is saying how the numbers have improved from the -26.5 in December, but I think the reading is awful.
So here we have the recession and major debt in the eurozone along with negative sentiment and a super-high unemployment rate encompassing the region. In the eurozone, the unemployment rate was 11.9%, or about 19 million unemployed, in January, according to Eurostat; this represents the highest number since the beginning of the eurozone in 1999. (Source: Jolly, D., “Euro Zone Reports Record Joblessness and Low Inflation,” New York Times, March 1, 2013.) Spain had a massive unemployment rate of 26.2% in January, according to Eurostat. America’s situation is also on fragile ground. (Read “What the Government Doesn’t Want You to Know About the Jobs Situation.”)
Add in the massive debt loans and pressure to cut spending, and you’ll see why I continue to be deeply concerned for that region.
Of course, the mess in the weak countries is driving down growth in France and Germany, the two pillars that are holding up the eurozone. France, especially, is finding things getting more difficult as the eurozone tries to dig itself out of its financial mess.
So as an investor, I would avoid Europe, but I would also watch the impact of the eurozone’s financial mess on other key global economies, including China and the United States.