A well known top economist just spent two weeks in Europe and returned saying he feels another debt crisis could possibly be brewing in Europe. While it is not 2008, there are several major banks which are still not strong, several sovereigns which are far from fixing their labor and fiscal problems and they are basically on the edge of a new recession with deflation becoming more of a possibility than before. The Euro is weak, and may get weaker. The ECB is trying, but the political and cultural problems create a situation that makes it very hard for the ECB or IMF to have much impact in some countries.
Italy continues to have a labor law situation that defies solution. You cannot fire anyone in Italy and you may be forced to continue to pay someone who did things that would be a firing offense anywhere else. As a result, almost nobody starts a new business in Italy and nobody gets hired unless it is critical to fill a position. So it is a vicious cycle. Labor law changes are not going to happen in Italy for a very long time, if ever. The unions rolled out one million people to protest a few weeks ago. Many other European countries, like France, have similar, but not as onerous laws, which inhibit economic growth.
When the bank stress tests were published there had been 25 banks that failed, which got reduced to thirteen and then lower, but to reduce the number, there had to be steps taken by the banks which built their capital ratios but which inhibit economic growth by limiting lending. Once again, unlike the US, where we have one Fed, there is a problem of differing politics and cultures which inhibit how much action the ECB can really take to force banks to clean up their mess.
Just this week the OECD came out and said growth in the world economy is much too slow and needs to accelerate. The problem is with weak banks, restrictive labor laws, and a near recession, the chance of any real economic growth in Europe in the next year or two is low to nil, and it is possible they could be in recession in 2015 with a further decline in the Euro. Add to this that Putin now knows he can do almost anything he wants to take over eastern Ukraine and to pressure Hungry and other east European countries to do his bidding, bodes bad for Europe. Merkel has shut the nuclear power plants and so now is totally at the mercy of Putin for a big portion of Germany's energy needs. He knows Obama will do nothing that has any real affect. So the crisis in Ukraine will continue and grow, the pressures on Hungry and other countries will grow, and the Eurozone will become more at risk of economic stagnation and geopolitical crisis.
As I have said several times prior, the risks in Europe are simply not worth taking for investors. Maybe you can buy shopping centers or office buildings at very deep discounts and get good current returns for the moment, but there is major exit risk and currency risk. The situation in Europe may get worse before it gets better, and for an investor the risk seems not worth it.
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