The Everlasting Eurozone Crisis


As the U.S. economy strengthens, Europe keeps tripping over itself. Europe's problems seem to jump from one country to another with little resolution, and worsening data makes it appear that any recovery is far off and very hypothetical. What's the latest on the eurozone crisis?

Raising the bar on unemployment
The latest unemployment figures paint a bleaker picture than in the depths of the financial crisis. While in late 2009 both the U.S. and the eurozone shared about a 10% unemployment rate, the past few years have seen diverging fortunes:

Source: Eurostat.

The worst-off countries are Spain and Greece, both hovering around 27% unemployment, while Germany has remained at 5.4% unemployment since August of last year. For comparison, Nevada has the worst unemployment rate of U.S. states at 9.7%, whereas North Dakota only has 3.3% unemployment.

These terrifyingly high unemployment rates are combined with governments attempting to cut costs and their debt-to-GDP figure in order to remain in the eurozone. However, as governments cut budgets, growth declines, GDP falls, and debt-to-GDP becomes an increasingly difficult ratio to shrink. In fact, debt-to-GDP in the eurozone increased from 87.3% at the end of 2011 to 90.6% at the end of 2012, even with a heavy focus on austerity.

Meanwhile, civil unrest keeps governments on their toes. One example is new Italian Prime Minister Enrico Letta, who promised a reversal of austerity, stating, "We will die of fiscal consolidation alone, growth policies cannot wait any longer." Tragically, while Letta was being sworn in, two policemen and a bystander were shot near the presidential palace by what the Italian prosecutor said was "a man full of problems who has lost his job, he'd lost everything, he'd had to move back home, he was desperate."

Little future hope
The Purchasing Managers' Index, a measure of economic activity, presented pessimistic numbers for the eurozone's future. The latest reading "indicated a drop in activity for the nineteenth time in the past 20 months," and, "New business fell for the twenty-first successive month, with the rate of deterioration accelerating for the third month in a row." In plain terms, things are still trending in the wrong direction.

The bad news has, however, sparked some hope that the European Central Bank will cut its main fixed rate on Thursday to help reverse the negative trends. The ECB cut the rate last July from 1% to its current 0.75%.

But profits roll in
Even with the civil strife and poor economic conditions, European banks have shown themselves more resilient than investors believed. UBS shares are up over 10% over the past week after posting a first quarter profit of $1 billion, handily beating expectations of $440 million, with its investment bank segment increasing revenues 74% compared to last year.

Lloyds shares are up nearly 20% over the past week after reporting a first quarter profit of $3.1 billion, compared to last year's $430 million. The bank remains nearly 40% owned by the government, and has more cost cutting planned with only about 8,800 jobs cut out of a planned 15,000.

Even with banks seemingly running sustainable businesses, any growth will need to come from a growing economy, which seems far off in Europe.

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