May 25, 2012
-- A climate of increased political instability in the eurozone has reignited fears over the outlook for the region. Unpopular austerity measures have damaged consumer and business sentiment and, yet again, Greece has returned to centre stage.
During the recent parliamentary elections, many Greek voters cast their ballots in favour of parties opposing controversial spending cuts. Attempts to form a coalition government have failed in the country, undermining confidence that spending cuts can be successfully implemented and rekindling fears that Greece might leave the single currency. The European Financial Stability Facility, the eurozone’s bailout fund, subsequently announced it would withhold €1bn of its latest tranche of bailout funds for Greece.
Meanwhile, the appointment of a new French President, Francois Hollande, who intends to prioritise economic growth over austerity, raised questions over the future prospects for the eurozone’s struggling economy, particularly as German Chancellor Angela Merkel continues to espouse austerity. To compound this, a disappointing election result in one of Germany’s most significant state elections undermined Merkel’s focus on austerity as a solution to the eurozone’s debt crisis.
European leaders are caught in an increasingly unpleasant ‘Catch-22’
situation that forces them to attempt to balance austerity with growth. However, it is hard to see how sustainable growth can be generated in the short term. European manufacturers are still suffering in an environment of declining demand and soaring unemployment. The rate of unemployment in the eurozone surged again during March to an aggregated level of 10.9%. Unemployment in Greece reached 21.7%, while Spain’s jobless rate hit 24.4%. Amongst young people, the unemployment rate in Greece and Spain is more than 50%.
The eurozone’s economy stagnated during the first quarter of 2012, registering zero growth. The region only just managed to avoid tipping back into recession, having previously contracted by 0.3% during the last three months of 2011. However, the economy was shored up by relatively strong growth in Germany. France’s economy did not grow at all during the first quarter of 2012, while the economies of Spain and Italy contracted. Greece’s economy shrank by 6.2% during the period.
Figures from the Investment Management Authority show that European funds remain very unpopular with investors. Amid the ongoing uncertainty, share prices have tumbled around the world, and this is likely to overshadow corporate fundamentals until investors feel that they can face the future with a degree of confidence.
Paul Dixon FPFS
Chartered Financial Planner