Europe Contains Bright Spots Despite Low Economic Growth Forecast

Investors ready to dismiss Europe after a dismal 2010 might want to take another look, as the Eurozone is expected to emerge with a growth rate comparable to …

Investors ready to dismiss Europe after a dismal 2010 might want to take another look, as the Eurozone is expected to emerge with a growth rate comparable to the US in 2011. But growth won’t be universal; much of Eastern Europe is outpacing the West, and Germany represents a solid investment while Greece, Portugal, Spain and Italy lag. See the following article from Money Morning for more on this.

If you wanted to describe how most of the European nations fared in 2010, you would do so quite easily by citing the old adage: “If it wasn’t for bad luck, they’d have no luck at all.”

Truth be told, Europe was in the news for most of 2010 – but for all the wrong reasons. A series of financial panics hit the weaker Eurozone countries hard, forcing draconian austerity measures in many countries and igniting concerns that the euro may not survive as a currency.

Against such an unappealing backdrop, it’s no real surprise that any positive information tends to be overlooked.

And that’s truly unfortunate, since for much of Europe – and for its stock markets – 2011 should be a pretty good year.

Better Than It First Appears

For 2011, the team of forecasters for The Economist is projecting 1.3% growth for the Eurozone (the 16 out of 27 EU countries that use the euro currency). At first blush, that appears to be decidedly inferior to the projected U.S. growth rate of 2.3%.

But it’s not that simple: You must also factor in the reality that the Eurozone’s annual population growth is only 0.1%, versus 1.0% in the United States. Once you do that the growth rates are almost identical – 1.2% in the Eurozone versus 1.3% in the United States.

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What’s more, the overall European rate of growth masks some big divergences between countries.

For instance, Europe’s overall performance is being held back by a group of underperformers, whose economies are growing slowly, or even declining. For instance, Greece’s gross domestic product (GDP) is expected to decline 3.6% in 2011. Other laggards (with their GDP growth/decline rates in parentheses) include Portugal (minus 1.2%), Italy (plus 0.9%), Italy (plus 1.0%) and Spain (plus 0.4%, an estimate I believe is highly over-optimistic).

In those countries, the austerity necessary to remain members of the euro community will cause some real economic pain. Factor those out, and it’s clear that Europe contains some real bright-spot economies.

When East Pursues the West

As has been the case for the past decade, the best growth rates continue to be among the countries of Eastern Europe. Those economies are still catching up to their Western counterparts in terms of their living standards, and are often more-free market in their orientation.

Poland is expected to grow at a brisk 3.8% pace. Latvia and Slovakia are both expected to post growth rates in excess of 3%. And the economies of Lithuania and Estonia will each advance at rates approaching 3%.

When the recession hit in 2008, these countries were expected to do particularly badly – with Latvia, Estonia and Lithuania written off as basket cases. As it’s turned out, however, after a horrendous 2009 that saw their GDPs dropped by more than 10%, all three Baltic states are now rebounding nicely – as is Slovakia.

Poland, whose currency was not linked to the euro, was able to absorb recession through devaluation. It’s now racing ahead even faster.

There have been some losers, however – those countries of Eastern Europe that were genuinely badly run. One example: Hungary. Growth is expected to be only 2% and debt levels are dangerously high.

Engine of Growth

Last but not least, there is Germany. The Economist panel is projecting growth of only 2%. But that’s almost certainly another example of Anglo-American economists underestimating Germany’s real potential. Its growth rate in 2010 is actually expected to be 3.3%.

Germany now has a substantial labor cost advantage over its neighbors in the euro community, and is growing relatively rapidly, as the costs of absorbing the former East Germany fade into the past.

As was the case back in the 1980s, Germany is one of the world’s great growth economies, with a structural trade surplus due to the efficiency and quality of its manufacturing. The euro, holding down Germany’s exchange rate through the inefficiencies of its European neighbors, only accentuates this trend and increases Germany’s growth potential.

As an investor, your portfolio needs exposure to Europe; it’s a huge part of the world economy, and growth and profitability in the better parts of Europe are highly satisfactory.

However, not many European companies are readily available to U.S. investors these days: As we warned you about several years ago, the expensive Sarbanes-Oxley registration requirements have driven many of them to cancel their Big Board (New York Stock Exchange) listings. That means that your best bets are one or more of the attractive-country exchange-traded funds (ETFs) that are available.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.


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