Don’t Count the Euro Out Yet

While markets have reacted with increased volatility to the escalating debt crisis in Europe, some fund managers are beginning to see light at the end of the tunnel.

Europe is embroiled in a full-scale economic, banking, and political crisis, and fund managers, both in Europe and the rest of the world, say they have felt the consequences. During the past year, markets have been reacting with increasing concern to the European Union’s struggle to stave off defaults and restore stability to its financial system, making it often difficult for investors to separate legitimate macroeconomic concerns from short-term market nervousness.

Europe’s Headwinds

The debt/GDP ratios of European countries have been steadily growing, and recent developments have introduced new levels of complexity to the problems facing Europe:

Slow Growth
For the past few decades, the eurozone countries have been growing at a much slower pace than the rest of the world, including the United States—making the prospect of “growing out of debt” a difficult challenge.

Increasing Public Deficits
Demographic trends are adding to the debt burden, as aging European populations imply spiraling health-care and retirement expenditures.

Political Paralysis
The EU’s cumbersome governance system, which requires consensus among all member states, makes it difficult to react quickly to growing market concerns. In addition to this, profound disagreements between economically “strong” and “weak” countries are stretching the limits of solidarity within the EU.

ECB Mandate
The European Central Bank’s focus on preventing inflation means that the eurozone cannot simply inject vast amounts of liquidity in order to devaluate its debt through inflation.