Has the Euro Zone Turned a Corner?
“I think the worst of the debt crisis is behind us,” said European Central Bank Governing Council member George Provopoulos in an interview with Bloomberg. “This does not mean that all weaknesses have been dealt with or that the road ahead will be without bumps. But I think the worst is over.”
The last big, bad thing to happen to Europe was the clumsy bailout of Cyprus. Market participants around the world cringed as European finance ministers proposed charging small depositors for the bail-in / bailout of the nation’s banking system. Cypriot policymakers shot down the initial proposal, justified in their belief that imposing losses on insured (small) depositors was the wrong way to handle the situation.
Violating the small-deposit safety net in Cyprus would have set precedence for the same thing to happen in other troubled economies. Even the idea of such a move has sundered confidence across the EU. As a result, many observers fear that depositors could head for the hills at the first sign of trouble, a move that would make a bad situation decidedly worse.
“The original idea of taxing all deposits in Cyprus had two weaknesses,” said Provopoulos. “First, all depositors, regardless of the amount of deposit, would have been affected. This idea would have been contrary to the established principle under which small depositors were fully protected. Thus, the idea violated this principle.”
“The second reason,” he continued, “had to do with the fact that while there were two weak banks in Cyprus, all banks would have been affected. These two elements, which fortunately did not remain in the final agreement, I considered negative.”
As the situation in Cyprus winds down from red to orange alert, policymakers have earned the opportunity to step back and survey the condition of the EU at large. Greece, Italy, Spain, Ireland, and France (among others) all remain in one form of Troika-orchestrated economic recovery or another. Controversial austerity measures remain in effect as consolidation remains a priority. Government deficit levels are coming down and, with a semblance of stability restored, yields on most sovereign debt has come down as well.
But a series of recently-released indicators suggest that things may get worse for the European economy in the coming months. The flash Markit Eurozone PMI reading for April remained flat at 46.5, indicating that the region’s economy is stuck in contraction. The services index edged up slightly to 46.6, still in contraction but also a two-month high. The manufacturing index dropped to 46.5, a four-month low.
Markit Chief Economist Chris Williamson commented: “Although the PMI was unchanged in April, the survey is signalling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify further in coming months rather than ease.”
On top of this, the flash reading for the German Composite Output Index fell to 48.8, a six-month low indicating contraction in the region’s largest economy.
Here’s how the market traded Friday:
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