Eurozone concerns building again after period of calm

Eurozone concerns building again after period of calm

Slowly but surely, worries over the 19-country eurozone are building again.

After being out of investors' spotlight for months, the single currency zone is facing a range of new concerns – from questions over Greece to the stability of its financial system.

That's evident from developments in recent days, such as the fall in Greece's stock market to 26-year lows and questions over the financial health of Deutsche Bank, Germany's largest bank.

The jitters – the worst since Greece needed another bailout last summer – risk complicating the eurozone's struggle to get the economy growth, create jobs and push up inflation.

Fourth quarter economic growth figures for the eurozone, due Friday, will likely show the region plodding along at a quarterly tick of around 0.3-0.4 percent – more or less the same rate it's been growing at for over a year despite favorable conditions such as cheaper oil, a lower euro and weak inflation.

If the consensus forecast proves correct, the eurozone will likely have done better in 2015 than any year since 2011.

That's not much to celebrate, though.

Annual growth of 1.5 percent isn't going to do much to reduce unemployment, which still stands at 10.4 percent across the region and around double that in Greece and Spain.

More worrying perhaps is that growth is unlikely to improve this year and the region has a series of risks looming on the horizon.

Greek hurdles

Greece's financial problems could flare up again as the government tries to implement reforms that its people are ardently protesting against.

Last week's general strike, which brought much of the country to a standstill in a protest against pension reform, and daily protests show the scale of discontent.

Because the government has only a wafer-thin majority in parliament, it could lose a vote on the reforms, potentially bringing it down and raising new political uncertainty.

The Greek economy, meanwhile, is widely expected to contract this year.

The markets don't appear too hopeful about the country's prospects.

On Tuesday, the benchmark Athens index fell to its lowest level since 1989, with the banks taking the biggest hit.

Danae Kyriakopoulou, senior economist at London-based Center for Economics and Business Research, says she's unsurprised the banks are in focus because around 100 billion euros ($113 billion), or 46 percent of all Greek loans, have soured.

"The struggles of the overall economy and the persistent high unemployment rate means that bad loans could continue increasing," she said.

The banks

Greek banks aren't the only ones lumbered with bad loans. Worries have grown in recent weeks over the financial health of Italy's banks, which are estimated to have 350 billion euros in bad loans, or more than 30 percent of the eurozones total.

That's one reason why Italian banks have been battered in the stock market this year and heightened calls for the government to reform the sector.

Bad debts have been a brake on economic growth since the financial crisis in 2008 by weighing on banks' inclination to lend money to businesses and households.

"The government can do more and should be pushing for consolidation of the smaller financial institutions and broader reforms in the justice system," said Nicola Nobile, senior economist at Oxford Economics.

"Without more change in these areas, we see the outlook for credit in Italy remaining fragile and so it will take longer for the banking system to support the recovery than in other eurozone countries."

Outside Italy, Germany's Deutsche Bank and Switzerland's Credit Suisse have also seen their shares slide on concerns their finances are not healthy enough as their earnings are pinched by tough market conditions.

Political uncertainties

Portugal and Spain have been bright spots in the eurozone over the past couple of years, the former for exiting its bailout program with little fuss, the latter for enjoying one of the region's strongest economic recoveries.

But both still face an array of economic problems that may be worsened by recent political uncertainty, which tends to weigh on investment and spending.

In Portugal, a recently-elected Socialist government is challenging the economic orthodoxy of austerity that the country has lived under for few.

Undoing budget cuts and privatizations may not go down well in some parts of the eurozone and could reawaken concerns about the country's government finances.

In Spain, political parties are battling to see who can form a new government following inconclusive elections in December.

So far, no deal is in sight and fresh elections are expected that could see insurgent parties – the radical left Podemos and centrist Ciudadanos – do better.

Populist policies could create uncertainty about the future path of Spain's economy.

Theres also the matter of a potential referendum in Britain on the country's membership in the European Union.

The vote could be held in June after Prime Minister David Cameron negotiates a package of reforms with his counterparts in the 28-country bloc.

"A Brexit is still very much a real risk and while the long-term implications (on the eurozone) of this are debatable, the short-term ones are clearly going to be very negative," said CEBR's Kyriakopoulou.


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