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Spring ’14 Peripheral Europe: On the Mend

Dave's Investment Insights Newsletter – Spring 2014

Written by Dave Lee
March 1, 2014

Beginning in 2010, a group of European countries that became known as PIIGS (Portugal, Italy, Ireland, Greece and Spain) sparked fears of runaway government debts, prolonged economic contractions and a painful break-up of the Eurozone that would be felt around the world.

Fortunately, the economic woes of these European countries are no longer the source of worry that they once were, and the four charts on the next page show the healing trend in these important economies.

Interest rates return to earth

At the peak of the crisis, fearful investors demanded higher and higher interest rates from these countries to compensate for the risk of default, with Greece at one point needing to pay more than 30% per year to borrow money. Since then, however, a combination of central bank policies, belt tightening and improving economic conditions have brought the yields on government bonds to much healthier levels.

Low inflation provides policy options

Eurozone inflation rates continue to trend below the European Central Bank’s (ECB) 2% inflation target. This points to continued low interest rates for the ECB and we may even see some of the “unconventional policy measures” that the UK and US have been employing such as Quantitative Easing (QE). Such central bank support would provide a boost to all Eurozone countries, including PIIGS.

Debt levels are moderating

Although debt levels remain high (as a percentage of GDP), they are now declining in Portugal, Italy, Ireland and Greece. The trend of improving primary balances (budgetary balance excluding interest payments) of PIIGS is also expected to continue.

Europe as a whole continues to face a number of headwinds which will likely prolong their sluggish economic growth rate, but as the crisis fades and stability returns there is a renewed sense of optimism that the Eurozone can pull through and continue to see brighter days.

All eyes are now on the Ukraine and the impact that political unrest could have on Europe’s energy supplies and regional stability.

Download the Complete Spring 2014 Investment Insights Newsletter