How is Europe doing?
Not very well! But even so, need we fear that the European debt crisis will eventually have repercussions on this side of the Atlantic, including on our personal finances? Here's a brief analysis of the eurozone crisis and its effects.
First there was the Greek crisis. Then the Irish crisis. Then the Portuguese crisis. And now the Spanish crisis. Followed by… the Greek crisis again. All of Europe is feeling shockwaves from the debt crisis, and even France, one of the two pillars of the European economy along with Germany, has just announced budget austerity measures that have raised more than one eyebrow.
A picture is worth a thousand words, so take a look at two statistics that help illustrate the situation: forecasts for GDP growth and unemployment rates.
The comparison with the United States (last column), still mired, as we know, in its own economic crisis, is eloquent. No major European country is expected to have growth that comes anywhere near that of Uncle Sam, and the unemployment rates in the hardest-hit countries are triple that of the United States. In Spain, unemployment has even reached 50% for some age groups. Portugal is seeing an increase in emigration to former Portuguese colonies. And we are increasingly hearing the phrase lost generation.
A complicated situation
"The crisis," as it is simply known over there, is really a complex blend of several factors:
- economic anemia in the majority of countries;
- a fragile financial system, with some banks needing emergency bailouts from their governments due to their struggles with doubtful loans;
- public finances that are generally in a sorry state, which, at worst, puts countries in danger of defaulting on their debts (see point 2) and, at best, limits the ability of government authorities to intervene (see point 1), when they are already burdened with banks to bail out (see point 2 again!).
In short, Europe in crisis is like a snake eating its tail, and it’s hard to tell where the problem begins and ends. Some people are calling for measures to stimulate economic growth, but that would undermine public finances even more. Others are calling for austerity measures, but then what would drive a renewal of growth?
Why not us?
We might well wonder why our own economy hasn’t felt the impact of this situation. In fact, we would be wrong about that. Early in the year, the governor of the Bank of Canada predicted that the European crisis, mainly because of its impact on the U.S. economy, would cut $8 billion out of our own economy in 2012 and would reduce the growth of our GDP by 0.6%. Some companies, and perhaps their employees, will certainly be feeling the effects.
And in our portfolios? Surprisingly, after a negative year in 2011, the MSCI Europe market index is up 10% since the beginning of the year, which compares with about 4% for the Canadian S&P/TSX index (figures as of October 4th). So there’s still some hope in European markets, and holdings you have there shouldn’t be performing too badly so far this year.
It’s also true, however, that we might still be facing the spectre of a long-term endemic crisis, or even a global domino effect like the one we went through in 2008. All that – because of poor credit management by the major financial players, the governments and their citizens?
Good food for thought.