Eurozone Debt Crisis: Why U.S. Investors Still Can't Relax

After nearly four years, billions in bailouts and increasingly strict austerity measures, not only is the Eurozone debt crisis no closer to resolution, but the attempts to solve it are pushing the region deeper into recession.

According to Eurostat, the Gross Domestic Product (GDP) for the 17-nation Eurozone plunged 0.6% in the final quarter of 2012, a steeper drop than the 0.4% economists had expected and the worst decline since 2009.

It's the third consecutive GDP decline for the Eurozone, reaffirming that the area is mired in a recession that started with the 2008 financial crisis and has been exacerbated by the ongoing Eurozone debt crisis.

For all of 2012, the Eurozone economy shrank 0.5%, while the U.S. economy grew 2.2%. Even the GDP of beleaguered Japan increased 1.9%.

Most ominously, the GDP decline of the Eurozone's largest and strongest economy, Germany, mirrored that of the region as a whole, falling 0.6%.

Long one of the few bright spots, Germany is slowly getting dragged down by its weak neighbors, which include Italy, Spain, Greece and even France.

The bad GDP news also belies the sunny assessments recently delivered by many economists and EU leaders.

"These are horrible numbers, it's a widespread contraction, which does not match this positive picture of stabilization and positive contagion," Carsten Brzeski from ING told the BBC.

Eurozone Debt Crisis Will Keep Pressure on Growth

While the Eurozone debt crisis itself is partly responsible for the region's current economic woes, the austerity remedies designed to address it are more responsible for eviscerating economic growth, Money Morning Global Investing Strategist Martin Hutchinson explained.

"Much of this sluggishness is the result of government austerity having taken the form of tax increases rather than spending cuts - the latter are not necessarily recession-producing, the former are," Hutchinson said.

Unless the governments in the most troubled Eurozone countries back off from the crippling tax increases, the economies in the region will continue to shrink.

While some economists see a Eurozone recovery starting later in 2013, the reality of continued weakness has convinced others to lower expectations.

According to the European Central Bank's (ECB) quarterly Survey of Professional Forecasters released today (Thursday), the Eurozone economy will have zero growth in 2013. The group had previously forecast growth of 0.3%.

Professional investors are even more pessimistic. A recent S&P Capital IQ survey of European fixed income fund managers indicated they expected the region to stay in recession for the rest of 2013.

And two weeks ago, the International Monetary Fund (IMF), in its World Economic Outlook, changed its 2013 forecast for the Eurozone from growth of 0.1% to a contraction of 0.2%.

Eurozone Weakness Hurting Some U.S. Stocks

U.S. investors need to keep an eye on the Eurozone debt crisis because an actual meltdown of the region would disrupt stock markets around the world.

But the Eurozone recession has already had a negative impact on many U.S. stocks with large operations in Europe.

Several companies that recently reported earnings specifically cited weakness in Europe as a drag on their results:

  • General Motors Co. (NYSE: GM): Though the top U.S. automaker earned a profit of $892 million in the December quarter, it lost $699 million from its European operations, causing GM to slightly miss expectations. Total losses for the year totaled nearly $1.8 billion, more than twice its European losses in the previous year. Rival Ford Motor Co. (NYSE: F) said last month that it lost $1.8 billion in Europe in 2012 as well, and could lose $2 billion in 2013.
  • Cisco Systems Inc. (Nasdaq: CSCO): The tech giant that manufactures much of the network gear that powers the Internet said revenue growth in Europe, which accounts for a quarter of the company's business, declined 5% even as revenue in the Americas rose 9%, and in Asia, 8.3%.
  • The Goodyear Tire & Rubber Co. (Nasdaq: GT): Goodyear blamed a 38% year-over-year decline in earnings on slower European sales, and the glum outlook for that region led CEO Richard Kramer to lower Goodyear's earnings guidance for 2013. "During the fourth quarter, it became increasingly clear that the effects of the European economic crisis will be felt for an extended period of time," Kramer said.
  • Koss Corp. (NYSE: KOSS): Even smaller U.S. companies have felt the effects of the Eurozone recession. Headphone maker Koss said its net income declined 59% in its fiscal second quarter mostly due to weak demand in Europe.

Even if the Eurozone debt crisis fails to erupt in 2013, any U.S. stocks with significant exposure there face risk to their earnings this year.

"People are still approaching the market there with a great deal of caution," Charles King, principal analyst at California-based tech consultancy Pund-IT, told Reuters. "There's still good reason for caution."

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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