CNNMoney: Eurozone's Economic Winter Not Over

Friday, 08 Feb 2013 08:26 AM

By Michael Kling

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Investors may have warmed to Europe, but the eurozone’s economic winter is far from over, financial experts warn.

Although the prospect of a eurozone break-up is off the table for now and the euro has stabilized, at least some say the eurozone’s underlying problems have not been resolved.

Unemployment in the eurozone is at 11.7 percent and over 26 percent in Spain and Greece. Retail sales were down 1.7 percent last year. European banks are showing dismal financial reports, CNNMoney reported.

Video:
Economist Predicts 'Unthinkable' for 2013

With European countries obsessed with cutting budgets and increasing taxes, odds of an economic rebound any time soon are remote.

“The economic concerns have not gone away. In the beginning of the year, there was a consensus belief that we got past the fear stage in Europe and we were moving back toward growth,” Frances Hudson, a strategist with Standard Life Investments, told CNNMoney. “But when you say ‘austerity,’ people feel terrible.”

And reforms that heartened investors may face headwinds due to political problems. Spain’s government is mired in a corruption scandal and its popularity is plummeting, while Italy will soon face important elections.

If Europe continues to struggle, a global economic revival is unlikely and global stock markets may falter, Hudson told CNNMoney.

Chances are low that the European Central Bank will cut rates as other central banks have done. Without a rate cut, European exporters will have difficulty competing against manufacturers in other countries.

Wolfgang Münchau, the Financial Times’ European economic columnist, agrees that the eurozone has yet to resolve its underlying problems. It should be forming a banking union with robust regulations. Instead, new legislation proposed in France and Germany, which would wall off their banks’ proprietary trading activities, shows that banking regulations will remain a national activity.

“Hardly a day passes by without someone declaring the end of the crisis. But its two most dangerous aspects are unresolved — zombie banks and macroeconomic adjustment,” he wrote.

“The most important signal sent by the unilateral legislation in France and Germany is the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures.”

Video: Economist Predicts 'Unthinkable' for 2013

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