Why Europe’s a Bomb Waiting to Blow Up
The doom and gloom on this side of the Atlantic is focused on the country’s pending “fiscal cliff,” but in Europe, it’s focused on the continent’s own financial crisis and how to escape it. You have six eurozone countries in a recession, with the whole region threatening to collapse into a recession in 2013. There’s barely any gross domestic product (GDP) growth while debt levels surge. You also have high unemployment and rallies on the streets of Athens and Madrid in response to the tough austerity measures put forth by Greece and Spain. You kind of wonder if Americans would flood the streets here if wages and pensions were suddenly axed.
Yet what makes the slowing of GDP growth in the eurozone a significant concern is its negative impact on the non-eurozone countries, including the Asiatic countries, such as China and Japan, which have seen their GDP growth affected.
We are seeing more cuts in GDP growth rates across the board for 2013. GDP growth in the United Kingdom (U.K.) was slashed to a mere 0.9% in 2013, down from the prior estimate calling for growth of 1.3%, according to research by the European Commission. The reality is that GDP growth could be even worse should the eurozone fail to sufficiently recover.
The European Commission is predicting a gloomy outlook, with the eurozone’s GDP growth contracting 0.4% this year and growing a muted 0.1% in 2013. Add in the massive debt loans and pressure to cut spending, and you’ll realize why I’m deeply concerned.
Of course, the problem is that the spotlight on the massive debt and bailouts of Greece and possibly Spain takes the focus away from trying to remedy GDP growth in Europe.
The reality is that the eurozone financial crisis is still around; the U.S. market just pushed it aside for the presidential election, but now there will be a refocus on the troubled eurozone.
Greece is still trying to pass its own austerity plan in order to receive another $31.5 billion euros in emergency funds or risk the real possibility of defaulting on its debt. The problem is that the deep budget cuts are occurring at a time of fiscal confusion, massive unemployment, and negative GDP growth. The deep cuts will hurt the country more in the short term, but they are needed to help Greece become a contributing member of the eurozone. It could take decades.
Spain could see its economy contract by a worse-than-expected 1.5% in 2013, according to the country’s central bank. Recently, Spain presented an aggressive austerity plan that focuses on budget cuts in lieu of tax increases; the country is trying to avoid asking for a bailout and all of the stricter budgetary requirements that are associated with a financial crisis.
But what is really worrisome is that the distress with the weak members of the eurozone is negatively impacting France and Germany, the only two strong pillars in the eurozone.
France is finding that things are getting more difficult as the eurozone tries to dig itself out of its financial mess. There is also the fear that Germany could stall, as the country’s industrial output contracted by 1.8% in October. If Germany falls, so will the eurozone. Capital Economics suggested France and Germany will face another recession in 2013.
The Federal Reserve and the European Central Bank (ECB) continue to buy bonds to keep yields in the troubled countries from surging higher. But this is only a bandage solution; it is not a remedy.
Trust me when I say that things will get worse in Europe.