Eurozone Faces Crucial Decisions for Its Recovery

 | May 18, 2017 | 9:00 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

EZU

For a long time, betting that the eurozone can get over its political challenges looked very risky, especially after the Brexit vote in the U.K. last year. That vote shined a strong light on the challenges that the European Union, and particularly the eurozone, face when it comes to remaining together.

Then came the presidential victory of Donald Trump, and it was difficult at the time to resist calls to short the euro. It looked like populism was gaining ground at an incredibly fast pace.

However, the Dutch elections in mid-March this year were an early sign that Europeans learned the lesson of Brexit and Trump's victory: unity matters more than disintegration. At least, that's the case for now.

The recent victory of centrist Emmanuel Macron as president of France over extremist Marine Le Pen reinforces that view. But the hard part -- that of ensuring the recovery is sustainable -- is only beginning for the eurozone.

The team over at charity portfolio Action Alerts PLUS, which Jim Cramer co-manages, yesterday added exposure to the eurozone by purchasing shares of the iShares MSCI Eurozone ETF (EZU) . "We want to make it clear that we are interested in this ETF because we think that Europe has begun to turn. We have been waiting for the French elections to get out of the way before we pulled the trigger because it could have been horrendous to start a position and then watch the euro fade into the sunset. Now, the coast is clear," they said in their alert to subscribers.

While it is true that the eurozone's prospects are much brighter than they were less than two weeks ago, the hard work is only just beginning. In a recent interview with Reuters, Benoît Cœuré, a member of the Executive Board of the European Central Bank (ECB), said that the recovery is entirely cyclical so far.

"In my view, the single most important issue for European governments, ministers and leaders is how to make it structural," he added.

In other words, the low price of oil and historically low interest rates are the main reasons why the eurozone's economy expanded at a pace that exceeded that of both the U.S. and the U.K. in the first quarter of the year. Indeed, around half the recovery since the crisis can be attributed to the ECB's monetary policy, according to Cœuré.

"If [the recovery] remains cyclical we'll be in big trouble because the economy will not generate the level of growth that will be enough to solve the structural issues of Europe," he warned.

And on that point, not much has changed. It's true that Macron has big ambitions for the single European currency area. He would like to see a separate budget for the eurozone under the administration of its own minister for economy and finances. The budget would have three functions: investing for the future, offering emergency financial assistance to members and responding to economic crisis.

Macron's program does specify that access to this eurozone budget would depend on member states abiding by common rules on fiscal and social discipline in order to avoid "dumping" within the eurozone. But a common budget surely would be rejected by countries such as Germany or the Netherlands, which would pay more into it than they would take out.

One idea that could work would be that of a "buy European" act, which would reserve access to public acquisitions in the European Union to companies that have at least half of their production based in the EU. But that would be a relatively minor decision, which would only serve as a signal rather than actually make a meaningful contribution to the continent's economy.

Over the short term, investors in the eurozone will continue to enjoy the area's cyclical recovery, especially relative to the U.S. and the U.K. That's because, first, the single currency area is earlier in its business cycle than these other two economies, as quantitative easing began later in Europe. And second, with the French election out of the way, the eurozone ironically looks more stable politically than either the U.S. or the U.K.

But over the longer term, the same challenges remain: the need for some form of fiscal unification (Macron's eurozone finance ministry and budget would be a step in that direction), a common insurance system for bank deposits to underpin trust in European banks, and more flexible labor markets to bring down unemployment.

These are big challenges, and they will not be overcome without a lot of political bickering and difficult choices. But compared with two weeks ago, the chances that the eurozone will remain intact have increased. On balance, Europe is still a buy.

Columnist Conversations

The Semiconductor sector (SMH) is rebounding off its 50-day moving average, and I'm picking at a few different...
we like this chart setup here and with earnings Thurs, we'll take a position. BOUGHT STZ AUG 185 CALL AT 6...
Warren Buffett's recent purchase of Store Capital Corp. (STOR), a real estate investment trust (REIT), seems t...
One of the big changes in this market in recent years is that all the very simple technical indicators tend to...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.