Europe was hit hard by the Great Recession and the sovereign debt crisis — more so than the U.S. Unlike Europe, the U.S. didn’t suffer through a double-dip recession.
U.S. stocks have rallied, with the benchmark S&P 500 climbing 28 percent this year. (The Euro Stoxx 50 Price Index is up 20 percent.) But U.S. equities’ ascent will slow, and there may even be declines when the Fed reduces its stimulus and lets companies stand on their own feet.
So the big question for investors is: Will Europe follow the same trajectory as the U.S.?
It’s hard to say because the two regions aren’t like-for-like comparisons. Europe has many — and different — economies, yet share the same monetary policy and currency. That creates vast imbalances.
The European Commission set up rules in December 2011 to monitor all 28 member states (including the 17 countries that use the euro) for economic risks resulting from those imbalances. It has since issued early warnings.
Most recently, the commission cited Germany’s trade surplus (usually a good thing, but in this case there’s weak domestic demand and deflation risks) and France’s high public spending as problem areas. Plus, 12 other countries were put under examination for lesser levels of imbalances.
And let’s see what today’s economic numbers are telling us — euro-zone gross domestic product increased by 0.1%, below expectations for 0.2%. Germany and France, which contribute almost half of the total output, slowed to 0.3% and -0.1%, respectively. Italy, which accounts for about 16.5% of GDP, also shrank by 0.1%.
So this tells us that a mix of stagnating growth, high employment and economic imbalances threaten to hold back the region. With risks still looming, we’d like to see positive signals before the risk/reward ratio can be tilted in our favor.
Still, there are companies in the euro zone that defy euro-zone problems, thereby offering tremendous profit opportunities.
The Money and Markets Team