Why the Eurozone Won’t Collapse, Not Yet

There’s always something to spook markets.

First there was concerns over Greece, worries over China and then Brexit.

Now it’s trouble in Italy threatening to send markets into financial crisis.

Because none of the main parties won enough votes to rule on their own, Italy’s been without a government for months.

Out of the chaos, a populist government has emerged. Which some analysts say threatens the entire economic stability of the Eurozone.

Ratings agency Moody’s warned last week it could cut Italy’s credit rating.

On all that news from Italy last week, investors were ducking for cover. Stocks plummeted and US bond prices soared as skittish investors bought US treasuries, in what is known as the ‘flight to safety’ trade.

But here’s something to keep in mind about all this.

What’s happened in Italy in the last few weeks is unlikely to change the broad European Outlook.

For example, in Germany the most recent survey by the Institute for Employment Research showed job openings hit historic all-time highs, in the last three months of 2017. There were more than 1.2 million unfilled job openings nationwide, with no expected decrease in sight.

The number of job vacancies is unprecedented and gives even more evidence to the developing strength in Europe’s biggest economy.

The Eurozone’s second biggest economy, France, likewise finished off 2017 on a strong note. France has recently revised its GDP estimates. The French economy grew more than previously estimated last year and is experiencing the fastest growth since 2011.

Same goes for Poland, which posted GDP growth of 4.6% in 2017. That’s their fastest GDP growth since 2011. Driven by higher economic activity in the European Union and likewise, Poland is revising up GDP growth estimates to 5% based on a strong first quarter in 2018.

As the threat from the Catalan crisis subsides, the EU Commission is also revising up GDP growth for Spain.

The Swiss economy also started off 2018 with a bang, displaying faster-than-expected growth. The expansion for the quarter exceeded previous estimates by economists. Consumer-spending growth rose at its fastest pace in two years, while investment in equipment hit a six-year high.

The World Bank is also revising up GDP growth forecasts for Romania as well, from 4.5% to 5.1%.

If the latest stats from the EU statistics office can be any guide, the 28-strong EU put in its strongest GDP growth performance in a decade.

So the recent troubles in Italy are unlikely to bring down the Eurozone, nor is it likely to be a trigger for a major financial collapse. Despite what’s said by the economic experts to the contrary.

A collapse just isn’t coming, not yet. So stop worrying and start investing effectively.

That’s not to suggest there might not be storm clouds on the horizon. It’s just that markets have never collapsed whilst interest rates have been at historic lows, like they have been. Major recessions only occur way after the central banks begin their tightening cycle, and not at the beginning.

But interest rates are coming off their lows and starting to normalise as you knew they eventually would. So that’s something to watch now.

If you look at the history, it’s roughly three and a half years on average, after the Fed starts to raise rates, that a recession is likely to occur.

The Fed started raising in December 2015, so that perhaps gives you something to watch for. Perhaps some sort of slowdown come mid-2019.

So far the economy is moving exactly to script, just as forecast by the real estate cycle. If you’d like to learn more about that, and how you can forecast events in the economy then go here.


Terence Duffy,
Lead researcher,
Cycles, Trends & Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money