Markets rallied last Thursday on the news of the potential remedy to the debt situation in Ireland that is expected to be announced sometime this week. While this will help remove some unwanted uncertainty from the market, I feel the remedy will merely mask a much more significant issue in Europe in relation to the region’s mounting debt and deficit levels in several of the weaker countries. The issue I see is that problems in one country impact Europe and take away from the achievement of stronger growth due to the need to rescue a member. The reality is that this cannot be good for Europe, which is struggling to grow.
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. Problems in the EU can and will likely spread to other economies in Asia, Latin America, and North America. The EU is critical to global economic recovery. Greece started the whole bailout program that led to the establishment of a trillion-dollar austerity program aimed to help out countries in financial distress.
Greece is a major receiver of funds. Ireland will be next. Then there are still lingering issues in Spain and Portugal. Greece, Ireland, and Portugal are not key economies, but Spain is the world’s ninth largest economy, so turmoil in that country could be devastating to the EU and the global economies in the west and Asia.
But here is the thing.
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, the 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 expects growth in the U.S. and Japan to exceed that in Europe. I feel that Europe may continue to underperform the global markets in 2010 and 2011.
My advice to you is not to be overly focused on domestic issues. You need to seriously monitor the debt situation in Europe. There has 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 tries to rein in growth that would likely impact other global economies.