Europe: New Troubles Ahead

It has been quite a while since we’ve heard about the debt problems of Europe. With the European Central Bank’s (ECB) highly successful Italian and Spanish bond auctions and the European equities market recuperating some of its losses last week, it seems that debt contagion fears are now a thing of the past.

Still, I can’t help but remain doubtful on the future prospects of Europe. While I am not a pessimist, I am a realist. Everything may seem fine and dandy now, but moving forward, how will Europe deal with the extremely tight austerity measures against the backdrop of very weak economic growth?

If you look at the economic situation of the euro zone’s largest economies, you’ll find even more doubts and questions than answers!

For one, unemployment in Spain is still ridonculously high at 21%, which is more than double the European average. Its labor market is so troubled that Spanish policymakers have even proposed to close their borders to Romanian immigrants, as over a third of Spain’s 860,000 Romanian residents are jobless.

France, Europe’s second largest economy, has got problems of its own to deal with, as evidenced by the lack of growth in Q2 2011. The French economy came very close to contracting last quarter as extremely weak consumer spending held GDP to a 0.0% increase.

Not to be one of those “gloom and doom” analysts or anything, but I think that such a weak figure seriously puts to question whether French President Nicolas Sarkozy’s target of 2 percent growth for 2011 is still a realistic goal, and whether France can really reduce its budget deficit to 5.7% of output by the end of the year.

Then there’s the issue of shaky industrial production. Germany, the giant of all giants that’s widely considered the euro zone’s last line of defense against a double-dip recession, posted a 0.8% decline in production in June. Likewise, Italy, the region’s third largest moneymaker, posted a 0.6% drop of its own.

If these economic giants can’t even bear the weight of their own troubles, then how can we expect them to lead the way for a European recovery? Better yet, what hope does Europe have if its largest economies can’t get their acts together?

Given the tight austerity measures, lagging growth in the major European nations, and risk aversion still lingering in the markets, I don’t see the euro being able to rise above the 1.4500 area.

Even if the euro does manage to go that high, I can’t imagine it holding above for very long! For the euro bears out there, keep the sell trigger near, as you may need to pull it very soon…

EUR/USD Daily Chart

  • MikeH

    It’s uncommon to say but the most popular pair is the worst pair to trade for the moment (so I think). We all got used to see nice EUR/USD trends. But now what do we have? -It’s like trading one of those korona/nzd pairs! -The sentiment is so mixed that nobody is making any good sens out of it. We all know for sure Eurozone had and has some serious problems, yet unexpectedly with some smooth bond auctions, EUR jumps like having a rocket booster in it’s bottom. Just as you might think: “ou well, now it’s time to buy the euro” – some problems from Greece (which isn’t a big economical force, it’s whole economical bases are based on Tourism and some regional petrol commerce) brings the euro down!?

    I would definitively not trade this pair for at least a couple months. My opinion though.

    Have fun trading.

    • Joshua Pearce Gibson

      Greece’s economy is small and has very little, if any, impact on the much wider Eurozone. The problem is that Eurozone banks all over Europe are holding a LOT of Greek debt. In a lot of cases, banks are holding more Greek debt than they have available assets(overleveraged). THIS is the problem with Europe. When you add to that fact the very high risk of Greek debts going bad, and you’ve got a problem that affects everyone, not just Greece.

    • sasa2340

      What’s wrong with range-bound movement?  Yes, the major currency countries have been indecisive and averted to make their decision clearly, but you can utilize the sentiment!  Its sentiment has been so clear to get bounce from the certain level (such as swing high, low, pivot..etc) in my opinion.  Anyway, I don’t force you not to trade because that’s your style :) just don’t lose money, right?

      Back to the point, I strongly agree with this post.  Even from my technical analysis, its bearish bias will hold until the price hits 1.4050 although the strength may depend on how weekly pivot gets penetrated though.  

      Have a good trading day!

  • FedeX

    And in the newsflow during the weekend: several calling to the ECB to lower its interest rate and the opinios are that the ECB halks were wrong again like in 2008.

  • wilson

    The euro dept issue has been mentioned countless time since last year(or the year before???)when the pair was at 1.3 till now 1.43 . Everytime after it drop 200-300 pips, it rebound.Market seems to be more interested in dumping the USD.

    • Joshua Pearce Gibson

      eurusd chart. link to clip2net.com

      • wilson

        I’ve seen the chart and understand that base on technical it SHOULD fall but with all these troubles mentioned in the euro (for the upteem times) we should see the euro fall HARD and FAST right?? But even at the height of last week turmor when stock fall 500-600 points (which was rare) euro hardly moved. If you pay attention to the rate at which EURO drop vs the rate at which it bounces back you can notice that the latter seems to be faster and strong while the drop always seems to be a crawl!!So where are we now??Why are we not seeing a sustaining fall that is HARD and FAST for the euro??

        • sasa2340

          I think that “hard and fast” movement is not fundamentally backed up.  You should remember the smart money who trick the other traders by using such news in short term by “shaking” them out.  The smart moneys who have been buying fiber in the previous looong uptrend have to sell, right? But there are numerous traders who want to buy.  However, overall, which side dominate the market in the larger picture? Especially quick and fast, I’ll just take the movement as retracement; for slow but certainly moving toward a direction, I’ll take it as reversal. 

          • wilson

            link to babypips.com
            link to babypips.com
            link to babypips.com
            link to babypips.com
            link to babypips.com

            Well, each is entitle to his/her own opinion but I just want to say that market sometimes do not react entirely to fundamental. The above few links were some of the articles written in march/april/july 2010 pertaining to the debt issue. The pair then was trading between 1.29 (When greece problem surface)-1.52. The debt issue had worsen considerably so logically I thought the pair should be in the range of 1.2 -1.3?? Talking about direction of the pair: If you look at the 4 hourly chart, the pair may may have already broken thru the down trend line.The daily looks like it is consolidating and the weekly still looks like a uptrend. Anyway, don’t bother about me .Trade what you think is right. Thank you.

  • john lewis uk

    A part from Europe, i believe that its a world wide problem. Even countries like Dubai also facing such problems. The time has come when all the countries of the world should unite and they must bring out some solution of it.So that economy of the entire world grow in a proper way.
    Thanks