Introduction

  • Written by 
  • 09/04/2014
Good news amid the euro-gloom 2 of 3 High risk bargains lure investors to Europe

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

European stock markets have been on an upwards rise, since July 2012, when Mario Draghi, president of the European Central Bank (ECB), promised to do “whatever it takes” to save the euro. However, the continent still faces serious problems, and it is too early to say whether a general recovery in equities can be sustained.

The Eurozone is still in recession: its overall gross domestic product (GDP) shrank by 0.3 per cent in the second quarter of 2013. And its governments are still heavily in debt, with total borrowing equivalent to around 90 per cent of total GDP – well above the 60 per cent limit originally agreed in the 1990s.

In countries such as Ireland and Spain, much of this debt has come from bailing out banks. Yet many more European banks are believed to be hiding further losses, and some analysts believe that, as a result, the continent could soon be plunged into another credit crisis.

Why politics could weigh on prices throughout 2013

Over the coming months, politics will influence stock market performance across the Eurozone, as ‘core’ countries such as Germany try to maintain fiscal discipline on the periphery – especially in the most heavily indebted countries of Portugal, Italy, Ireland, Greece and Spain (the so-called PIIGS).

Throughout the year, negotiations over EU budgets, banking reform and greater fiscal union all have the potential to flare up and spook the markets

The markets have received a political fillip in the form of Nicos Anastasiades, the new president of Cyprus. He was elected on an austerity platform, and has stated a willingness to implement the tough reforms necessary to secure an €18 billion bail-out from the ECB. However, even if he gets his way, the country’s overall debts will rise to 150 per cent of GDP – an unsustainable figure, in the opinion of the International Monetary Fund (IMF).

Meanwhile, in Italy, the new prime minister, Enrico Letta, has pledged to reverse the austerity policies of his predecessor, Mario Monti – and to persuade other EU countries to take similar steps. “We will die of fiscal consolidation alone,” he said in his first speech to the Italian parliament as leader, on 28 April, adding that “growth policies cannot wait any longer.” Italy’s debt-to-GDP ratio is 130 per cent – not the worst in the Eurozone (the equivalent figure for Greece is 170 per cent), but potentially very harmful given that Italy is the continent’s third-largest economy.

Germany goes to the polls in September for its own general election, and is expected to return chancellor Angela Merkel to power. As the person chiefly responsible for preventing a total meltdown of the euro so far, she has won high approval ratings at home. However, she is also under pressure to forbid further bail-outs of peripheral Eurozone countries – Cyprus included – and may yet be punished by voters if she pledges further German funds to support the ECB.

Throughout the year, negotiations over budgets, banking reform and greater fiscal union all have the potential to flare up and spook the markets.