Are the current levels of financial markets in Europe justified?

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In recent years, there has been an almost continuous rise in the level of stock market indices in Europe, despite macroeconomic factors that are certainly better than previously observed but still fragile.

If we look more closely at the main European stock market indices, we see a CAC 40 (France) at its highest level since the 2008 financial crisis at 4500 points, the DAX Xetra (Germany) at around 9630 points, the FTSEMIB (Italy) at around 20650 points, the IBEX 35 (Spain) at around 10465 points, the PSI 20 (Portugal) at 6900 points and the AEX 25 (Netherlands) at 400 points. Since the beginning of 2014 alone, the gains in the indices of the countries still known as “PIIG’s” have been high: +5.17% for Portugal, +5.54% for the Spanish index but the best evolution since 1 January 2014 goes to the Italian index which has been awarded +10.44% ! Why such scores?

Can we start to believe that the crisis is behind us and that the economic recovery is ahead? Not so sure. It is obvious that with the optimism shown by the US stock markets, it seems natural to want to let oneself be carried away by an incipient euphoria, but it would be rigorous and prudent not to forget the much darker data of the European economies: growth rates, unemployment, debt levels, public deficits…

Take Italy as an example. Despite a significant increase in its stock market index, not all problems have been solved, far from it.

A notable upsurge of optimism occurred in Italy with the appointment of Matteo Renzi as Prime Minister. Markets have been relatively confident about Renzi’s ability to implement the economic reforms Italy needs. This “oxygen balloon” was supported by the decision of the Moody’s rating agency to raise the outlook for the country’s credit rating, which resulted in a further reduction in the borrowing rate on Italian debt.

Despite the end of the recession, there are still major problems: still high unemployment (about 13%), an abyssal debt (about 2000 billion euros). That said, the arrival of Renzi, who enjoys the support of a large part of the population, makes it possible to envisage a better future: the gap between Italian and German borrowing rates has fallen to an eight-year low, thanks to the prospects provided by the new government. There are also encouraging signs in Portugal: GDP growth has been revised upwards from estimates, the country must exit the Troika’s aid plan (IMF, Commission and ECB). However, can we think that Portugal has emerged from the crisis? Again, nothing certain.

After several quarters of decline, the country’s economy has emerged from recession. On the other hand, the unemployment rate remains very high (almost 16%) but it has started to fall and exports are also doing better. However, it is important to remember that public debt is still around 130% of GDP and that cuts in public spending can weaken this timid recovery.

In the case of the Netherlands, it is this “good student” of the euro zone who has posted the worst performance of its stock market index since the beginning of this year. How can this be explained? Unlike the other countries mentioned above, the Dutch economy is doing well, with a record trade surplus and a low unemployment rate.

However, the end of 2013 was a cold day in Holland when the rating agency Standard & Poor’s downgraded the kingdom’s rating when it was one of the last holders of the famous “AAA” with Germany, Finland or Luxembourg. The justification for such a decision was weaker than expected growth prospects, mainly.

One can add the fact that a real estate bubble started twenty years ago burst in the Netherlands, resulting in a fall of around 20% in real estate prices.

The domestic economy weakened and then a fall in domestic consumption followed, further degrading the growth prospects…

Analyzing all the data cited in this article, we can see that stock markets in Europe are experiencing a significant improvement, undoubtedly driven by a renewed optimism in the United States linked to a recovery in growth as well as by budgetary reform efforts in the various countries and the recent measures of the European Central Bank.

However, it is important to remain clear about the fragility of most of these economies (except Germany, which to date has fared well) since debt and unemployment levels remain high with soft growth.

Renald MARISSAL

Renald MARISSAL


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