The Euro Area is an economic and monetary union of 18 European Union countries that adopted the euro as their currency. The countries it comprises are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
The Euro Area is the second largest economy in the world and if it was a country it would be the fourth most populous with 330 million inhabitants. France, Germany, Italy and Spain are the most important economies accounting for over 74% of the Union’s GDP. The current economic crisis affecting some of the Euro Zone peripheral countries has been raising doubts over the euro’s future and is the major obstacle to growth.
Euro Area seasonally adjusted GDP remained stable in the second quarter of 2014, compared with the previous quarter. Strong numbers in Spain and Netherlands were not enough to offset shrinking growth in Germany and Italy and stagnant France. Compared with the same quarter of the previous year, seasonally adjusted GDP grew by 0.7% after a 0.9% rise at the beginning of the year.
Among Euro Area member states, Cyprus economy contracted the most (-0.3%) followed by Germany and Italy (-0.2% respectively). The expansion was reported in Netherlands (0.5%), Spain (0.6%), Belgium (0.1%), Portugal (0.6%), Austria (0.2%), Estonia (0.5%), Slovakia (0.6%) and Finland (0.1%). The growth stalled in France.
In July 2014 the Euro Area seasonally-adjusted unemployment rate was 11.5%, unchanged from June 2014 and at the lowest level since September of 2012. Youth jobless rate edged up to 23.2% for the Euro Area. Unemployment Rate in the Euro Area averaged 9.66% from 1995 until 2014, reaching an all-time high of 12% in February of 2013 and a record low of 7.20% in March of 2008.
In August, Euro Area annual inflation was 0.3 percent, down from 0.4% in July, 0.5 percent in June and 1.6 percent in July of 2013. This is the lowest annual inflation rate since October 2009. Among the Euro Area member states negative annual rates were observed in Greece (-0.8%), Portugal (-0.7%), Spain (-0.4%) and Slovakia (-0.2%). The highest annual rates were recorded in Austria (1.7%), Luxembourg (1.2%), Finland (1%) and Germany (0.8%).
The Euro decreased to Eur 1.31 against the USD in August from Eur 1.33 in July of 2014. Euro is down over 5% against the USD, calender year to date.
Bond yields in the Eurozone have fallen sharply over the last one year, with ten year yields of Germany and France trading to record lows while yields of PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) have come off sharply from highs seen in the peak of debt crisis in 2011 and 2012. Read our analysis PIIGS are flying really high.
The German index has given a return of 16.87% on a year on year basis but has remained flat on a year to date basis. On a month on month basis the index has declined 1.28% from End of July 2014 to end of August 2014.
The CAC index (France) has given a return of 14.92% on a year on year basis and rose 4.55% on a year to date basis. On a month on month basis the index rose 1.22% in August 2014.
The Italian stock market index has given a return of 26.04% on a year on year and rose 10% on a year to date basis. On a month on month basis the index declined 2.09% in August 2014.
The stock market index of Spain has given a return of 35.79% on a year on year basis and rose 12% on a year to date basis. On a month on month basis the index declined 1.9% in August 2014.
The EURO STOXX 50 is a major stock market index which tracks the performance of 50 Blue-chip companies based in twelve Euro Area countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The Euro Area Stock Market (EURO STOXX 50) increased to 3164.43 in August 2014 from 3115.51 in July of 2014. Stock Market in the Euro Area averaged 2433.23 from 1986 until 2014 reaching an all-time high of 5464.43 in March of 2000 and a record low of 615.90 in November of 1987.
The reason why most of the stock market indices have given double digit returns on a year on year basis coupled with a positive or flat return on a year to date basis but has declined or remained flat on a month on month basis is due to the fact that the Euro Area is not able to show sustained GDP growth in most of the countries coupled with no rise in inflation that is targeted at 2% and high Unemployment rate of 11.5% that is close to record high levels of 12%. GDP growth coupled with rise in inflation and reduction in the Unemployment rate was seen in the last one year for the Euro Area to which the markets reacted positively delivering healthy returns.
The solution to the above problem of the Eurozone is difficult to be implemented in the wake of austerity measures that curbs Government spending because of the increase in the debt of the economy. Fiscal expansion along with monetary easing is most likely to be implemented for the Euro Area as revival in the manufacturing and services sector can bring back the GDP growth on track. High debt levels can only be serviced once growth revives and unemployment is reduced. The ECB President Mr. Mario Draghi is of the opinion that Governments across the Euro Area would have to remove constraints in the form of austerity measures to give way for sustained growth in the GDP for most of the economies.
If economic stimulus is given to the Euro Area in the form of monetary easing and fiscal expansion growth would steadily revive in time to come giving a further rally in the developed and emerging markets of the world. Read our Analysis – Draghi could lead the next rally in Sensex, Nifty, INR and 8.40% 2024 GOI.
Contrary to the Euro Area, India has witnessed high inflation coupled with low GDP growth in the last one year but the stock market indices have rallied on the hopes that the newly elected Modi led Government at the Centre would revive the economy in the near future. The GDP growth is expected to increase to sub 6% levels in the current financial year and inflation has cooled down to levels of 7.96% for the Consumer Price Index and 5.19% for the Wholesale Price Index.
The Sensex has given a return of 37.68% on a year on year basis and rose 27.65% on a year to date basis. On a month on month basis the index rose 2.11% in August 2014.
The US economy has also shown sustained recovery in the GDP growth in the past three years coupled with marginal rise in inflation levels and sharp decline in the Unemployment rate that has allowed the Fed to reduce quantitative easing and eventually raise interest rates in 2015 that have been kept unchanged at record low levels for a long time. The GDP growth was reported at -2.1% and 4.2% for the first and second quarter of 2014 respectively. The Unemployment rate came down from 7.4% in August 2013 to 6.2% in August 2014. The above economic indicators point to a sustained recovery in the US economy unlike the Euro Area that has failed to sustain growth after it had shown marginal recovery in the near past.
The Dow Jones Industrial Average has given a return of 15.45% on a year on year basis and rose 4.84% on a year to date basis. On a month on month basis the index rose 0.75% in August 2014.
Table 1: Monthly Market Movement