Europe, Not Doing So Well

The Eurozone is just not doing so well.

As today’s lead editorial of the Financial Times puts it,

“The eurozone poses a conundrum.”

The cause is both economic and political.

“Recent figures suggest it is teetering on the brink of recession. Challenging conditions for manufacturers — partly brought on by trade tensions — ensured stagnation in Germany, the bloc’s largest economy, in the final quarter of last year.“

But, the government of Angela Merkel, German Chancellor, appears to be falling apart: unfortunate for a leader that did so much for Germany, and Europe. Ms. Merkel is apparently facing the fact that she may not be able to finish out her final term in office.

“France, the second-biggest, shrank, due to disruptive strikes over pension reforms.”

And, Emmanuel Macron, French president, is facing all kinds of pressures hindering his efforts to reform the France and its economy. Mr. Macron continues to lose members of his governing coalition, not helping his overall attempts to govern.

And, “Italy’s economy went backwards too, setting up the possibility of its third recession in a decade.”

Politically, what can be said about the status of the Italian government, still in chaotic balance.

And, the value of the Euro has been suffering, dropping to its lowest level in several years.

Matthew Rocco writes in the Financial Times,

“’What’s interesting is that the market consensus has been forecasting a recovery for the euro since early 2018 and it has consistently been wrong,’ said Jane Foley, head of currency strategy at Rabobank. ‘This is not just about the coronavirus, this is a euro story,’ she added, noting that investors have been spooked by weakness in eurozone data, particularly coming out of Germany, as well as a turbulent political backdrop.’”

The eurozone, as a whole, grew by 1.2 percent in 2019, down from 1.9 percent in 2018.

The European Commission is forecasting this rate to drop to 1.1 percent in 2020.

The largest country in the eurozone, Germany, posted only a 0.6 rate of growth for 2019, down from 1.5 percent the year before.

Germany ended the year with a no-growth fourth quarter, down from a 0.2 percent rate of growth in the third quarter.

Martin Arnold reported that the year ended on an even more dismal note.

“Unexpectedly weak December industrial production figures published earlier this week showed the biggest monthly fall in almost four years. That followed a 1.6 per cent drop in eurozone retail sales in December, the steepest monthly fall for a decade.”

And, the political situation does not make the situation any better. With governments in chaos or crumbling, little or nothing is going to get done to create positive policies to work against these pressures.

Furthermore, nothing here is mentioned about the Chinese virus invasion. No one really knows just how much of an impact the spreading virus will have on the overall situation. There are a growing number of stories about how German car manufacturing is being disrupted by the supply chain problem is heavily dependent upon Chinese sources. More disruption may be coming.

The only positive thing economists and other analysts are talking about these days is the room that the European Central Bank has to stimulate the eurozone if things deteriorate from here.

The problem here, however, is that the eurozone is mired in negative interest rates. Just how much can be done from here in terms of the ECB providing “quantitative easing” support when interest rates are at the levels they now are.

There seems to be a distinct difference between the situation in Europe and that in the United States in terms of the economic issues.

I have written a series of posts on the structural changes that have taken place in the United States economy and how these changes have apparently made current aggregate economic data outdated. The result of this research has indicated that the slower measured economic growth does not really show up how well the US economy is doing. Even though economic growth is modest, 2.3 percent real GDP growth in 2019, unemployment is at a 50 year low and other indicators also point to a stronger economy.

It appears that the same cannot be said of the European economy. This would imply that the situation in Europe, relative to that in the United States, is even worse off. Hence, this would be further reason why “risk averse” funds might be leaving Europe for the United States.

If this is the case, Europe seems to be in no position to correct itself and do the things it would need to do in order to be more competitive in the world.

As French president Emmanuel Macron has found out, many people in Europe are not yet willing to face the reality of the twenty-first century and move to become part of the global economy. And, with the growing populist movements in the eurozone, other nations are also not willing to make this move.

Bottom line, Europe, to me, does not to be a very fertile ground for investment at this point in time. The eurozone just does not have its act together. Furthermore, I don’t see anything to lead me to believe that it will be turning around soon.

If the European Commission only sees a 1.1 percent rate of growth this year with little to nothing being done to change the direction the economy is heading in, what good can be expected for the near future. And, how bad will the coronavirus be?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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