Europe is still dealing with a variety of issues relating to the European debt crisis, but it seems like the worst and most immediate problems are over for now.
There is a general consensus by economists that the biggest issues facing economic growth no longer relate to the E.U. and its debt problems. This is in stark contrast to the situation months ago, where the viability of the entire financial system was put into question.
Europe facing less immediate problems now
Portugal and Spain will remain to be problems in the near future, but this is quite different from questioning whether or not the major banks will fail. Now the focus has moved on to how deep and how long the recession will be in Europe.
“A recession is not good, but it’s short of the ‘crisis’ that had the markets alarmed a few months ago,” commented Rex Macey, chief investment officer of Wilmington Trust Investment Management.
It seems that the aggressive flood of cash into the eurozone’s banking system has succeeded in staving off a full on meltdown. This move has helped in the recovery of both European and American shares. For example, Bank of America, the worst performer in the S&P 500 last year, plunged 58% in 2011 and has rebounded by more than 65%.
“It’s like we went from having to deal with a heart attack, where we were worried about immediate survival, to cancer,” said Macey. “Europe’s debt problems are still very serious, as are the side effects of austerity and inflation, but now we have a bit of time to deal with them.”
If not Europe, then what are economists worried about?
Most economists believe that uncertainty in Washington is the biggest risk at the moment. This is due to the upcoming elections, where taxation and other monetary policies could vary greatly from on candidate to the next.
Others are more worried about corporate profit growth. This is due to the stagnation that most developed countries have experienced, but furthermore because of the slowdown that developing countries seem to be experiencing as well. Chinese premier Wen Jiabao scared markets last month when he stated that the new GDP growth forecast for China will be 7.5 rather than 8 percent.
Long Term European Bonds
Most economists will be keeping a close eye on the yields of bonds from Italy, and Portugal. Earlier this week a less than stunning Spanish bond auction brought up concerns about Spain’s ability to meet its target defect level for 2012.
Recent auctions have mostly been short term debt.The main area of focus will be on the long term debt. This will show how buyers feel about the governments ability to pay on a long term scale.