Why You Shouldn’t Be Ignoring Europe

Traders are concerned about the nuclear fallout in Japan, along with the conflict in Libya and North Africa; but, for whatever reason, the debt and growth issues in Europe appear to have been pushed to the backburner. In my view, this is dangerous.

While there are issues with jobs and housing in the U.S., my advice is that you should not ignore the massive debt and deficit problems plaguing Europe.

Without renewal in Europe and other foreign markets, we cannot expect a sustainable recovery. This is basic economic analysis.

First we had the massive bailouts of Greece and Ireland. Now there is speculation that Portugal may be next to seek emergency funds to stay afloat. When the country is paying out an enormous 7.9% on its 10-year bond, this cannot be good. Yet, the high rate is required to attract investors due to the high risk of holding Portuguese bonds.

Portugal’s Prime Minister Jose Socrates recently resigned after failing to get an austerity program approved. The government is scrambling to find solutions to the mounting issues.

The problem is that Portugal is broke and cannot continue to pay out high-yielding bonds. The country will need to reorganize its financial structure and try to renew its economy and finances. Standard & Poor’s cut its view on the country’s five biggest banks.

While Portugal is not a significant player in the European Union, weakness there could impact other countries, including neighbor Spain. The latter also needs to raise more capital and remains in a risky position. The problem that is Spain is a major global player, with its economy being the ninth largest in the world.

Take a look at the comparative growth rates. In Europe, there are concerns with the slow growth there. In Germany, the gross domestic product (GDP) growth in 2011 is estimated to fall to 1.4%. In comparison, the U.S. economy is predicted to grow about 2.4% in 2011.

I feel that Europe may continue to underperform the global markets in 2010 and 2011.

In Europe, the 27-member European Union (EU) is critical to the global economic recovery. There are over 500 million people in the EU, accounting for about 28% of the world’s GDP in 2009, according to data from the International Monetary Fund.

The problem is that the big countries such as Germany and France are supporting the weaker members that cannot survive on their own at this time without capital infusion. This is not good, and it will hamper growth in Europe. The trillion-dollar austerity measures will take away from investing in the country’s growth and economic renewal.

The last thing the EU wants is weak members dragging the member group down, especially at a time when the region is trying to rebound from the global recession.

The reality is that the global economies are interlinked and problems in one region of the world will have a domino effect on countries and regions thousands of miles away.

The bottom line is that sustained growth in America cannot be achieved without renewal in the major world economies, which is why Europe should not be ignored.