Eurozone Financial Crisis Spreading to Other Nations
While many investors in America are focusing on domestic issues, we have to remember that we live in a global economy. What happens to other nations can certainly hit our shores. While some people have been optimistic that the financial crisis within the eurozone has turned the corner, new evidence points to the contrary.
The latest information from the eurozone shows just how weak the continent is and how much damage the financial crisis has done to its economic union. Germany’s industrial production in September fell by 1.8%, far worse than many economists have estimated. There was also a decline of 2.2% in intermediate goods and a 3.5% loss in capital goods in September on a monthly basis. (Source: “German industry output drops in Sept, manufacturing weighs,” Reuters, November 7, 2012.)
Germany has been the strongest member within the eurozone, holding up in the face of the financial crisis in the weaker periphery countries. Recent data points to the fact that even the strongest members of the eurozone are succumbing to the financial crisis as it spreads across the borders.
Germany’s Economy Ministry stated that it believes its nation will experience weaker economic conditions over the winter period. With output decreasing and exports to other eurozone members declining, the Ministry stated that it doesn’t believe Asian demand will be enough to counteract the weakness from the other eurozone members. (Source: “German Growth Set to Slow as Eurozone Crisis Hits Home,” Reuters, November 9, 2012.)
The backstop to the financial crisis in the eurozone has been the European Central Bank (ECB). However, the latest statements by ECB President Mario Draghi do raise doubts about the ability for the central bank to limit the possibility of the financial crisis escalating. Draghi stated that the ECB couldn’t do much more to help Greece. I think the full meaning of the following statement by Draghi is self-evident: “The ECB is by and large done.” (Source: “Draghi open to ECB rate cut, done helping Greece,” Reuters, November 8, 2012.)
While the ECB did not move to cut rates at the current meeting, more eurozone members coming out with weak economic data and the possibility of the financial crisis worsening is increasing. With America’s economy still in a deep trough, any improvements by the eurozone would be a huge help to the global economy.
If the eurozone were to crumble, the financial crisis would not be limited to just that union. Many institutions in America have exposure to the eurozone. No one can accurately predict the ramifications of the eurozone deteriorating in a panicked fashion; but if a financial crisis were to break out, its impact on America would most likely be quite severe.
While I hope that the eurozone members can get their act together and prevent the financial crisis from erupting, I certainly see no signs of a resolution anytime soon.