Europe Hopes To Slim Down PIIGS

7/5/2010


In the March quarter, gross domestic product (GDP) rose 0.6% in the euro zone, the first growth since September 2008. But not all is well in the zone, comprised of the 16 countries that use the euro as their currency (recently admitted Estonia will soon make 17). In June, the euro fell to a four-year low relative to the U.S. dollar, and the jobless rate hit a 12-year high in April.

Standard & Poor’s downgraded the debt of Greece, Spain, and Portugal in April, while Ireland and Italy also face crushing deficits. The five countries form a group ignobly called PIIGS.

To clear up its debt problems, Europe wants to sprint in the opposite direction. The popular solution: austerity. The PIIGS have been forced to slash spending to address their deficits. Even healthier countries such as the U.K., France, and Germany are plotting a similar course.

Reducing debt is a fine idea — unless it happens everywhere at once. America is still trying to recover from the painful period when both consumers and businesses stopped spending. Understandably, the U.S. fears Europe will slow spending too much.

By one estimate, Europe represents 9% of direct sales for companies in the S&P 500 Index. Indirect exposure also plays a critical role. Should Europe buy less from China, Chinese demand for U.S. goods could suffer.

Be prepared for pressure on the profits of U.S. multinationals. A June summit by the Group of 20 ended with a pledge for the wealthiest nations to cut their deficits in half by 2013. While President Obama negotiated a “growth friendly” approach, a substantial decline in spending seems likely.


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