Sunday, January 06, 2013

Question #10 for 2013: Europe and the Euro

by Bill McBride on 1/06/2013 02:44:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Mostly I focus on the US, but like everyone I've been watching Europe a little more closely over the last few years.  Unfortunately the situation in Europe remains grim, with high unemployment - especially in Greece and Spain - and most of the eurozone in recession.

However the crisis has eased a bit. There are several reasons - one key is the the ECB's longer-term refinancing operations (LTROs) that was offered in December 2011. These have a 36 month maturity, and the LTROs have helped lower borrowing costs in Europe.

European Bond Spreads Click on graph for larger image in graph gallery.

This graph, from the Atlanta Fed, shows the 10-year bond spreads for a few European countries (this is the difference between the 10-year bond of each country to the 10-year of Germany).

By this measure, the financial crisis has eased recently (the recent agreements with Greece have helped too).

With a Greek deal in place, and Germany's Merkel motivated by the election later this year to keep the eurozone together, and a strong commitment by other policymakers to the euro, I think there is a good chance that the eurozone and the euro will make it through 2013 intact. 

Even though I've been pessimistic on Europe (In 2011, I argued that the eurozone was heading into recession), I was less pessimistic than many others. Each of the last two years, I argued the eurozone would stay together (2011: Europe and the Euro and 2012: Europe and the Euro). My guess is the eurozone makes it through another year without losing any countries or a serious collapse.  Obviously several countries are near the edge, and the key will be to return to expansion soon.

Note: unless the eurozone "implodes", I don't think Europe poses a large downside risk to the US.  If there is a breakup of the euro (something I do not expect in 2013), then the impact on the US could be significant due to financial tightening.

Here are the ten questions for 2013 and a few predictions:
Question #1 for 2013: US Fiscal Policy
Question #2 for 2013: Will the U.S. economy grow in 2013?
Question #3 for 2013: How many payroll jobs will be added in 2013?
Question #4 for 2013: What will the unemployment rate be in December 2013?
Question #5 for 2013: Will the inflation rate rise or fall in 2013?
Question #6 for 2013: What will happen with Monetary Policy and QE3?
Question #7 for 2013: What will happen with house prices in 2013?
Question #8 for 2013: Will Housing inventory bottom in 2013?
Question #9 for 2013: How much will Residential Investment increase?
Question #10 for 2013: Europe and the Euro

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