Eurozone crisis spreads

May saw the eurozone crisis building momentum, with some analysts going as far as to doubt whether the euro could remain as a single currency.

With Greece now having sufficient bailout funds to see it through its short-term needs, focus has turned to how the bailout might affect those countries that were providing the cash. Specifically, with economic recovery still fragile, could the price of the Greek bailout be recovery in Europe?

The new phase of the crisis was not reflected in relative market performance, largely because eurozone markets have already dropped significantly this year. The FTSE Eurofirst index was down 5.8% in May, which actually made it the strongest performer of the major markets. The FTSE 100 was down 6.6%, the S&P 500 down 8.4% and the Nikkei down 10%. The major markets of France and Germany saw disparate performance. France’s CAC 40 dropped just 2.3%, while the German Dax was among the worst-performing of all major markets, falling 11%.

In spite of this relatively strong performance, the Europe ex UK sector is still the worst-performing for the year, dropping 11.2% over the year to date. Investors would have been marginally better off in the European Smaller Companies sector, where funds have only fallen 5.8% on average.

There are, of course, plenty of reasons to be concerned about the situation in the eurozone. Among the bad news last month was Spain’s downgrade by Fitch, who cited its “poor growth prospects”. This came in spite of its €15bn (£12.5bn) austerity programme, designed to rein in its deficit. Meanwhile the IMF issued a report that was highly critical of eurozone governments and urged action to stave off disaster. It said “far-reaching reforms were necessary” and singled out Spain for its “dysfunctional labour market and banking sector”.

Yet the economic statistics do not yet reflect the difficulties of the situation. GDP growth between January and March was weak but, at 0.2%, not disastrous. Italy saw the fastest growth, rising 0.5%. Spain managed an anaemic 0.1%, while Germany reversed its weak last quarter with growth of 0.2%. It is a long way off the figures for the US (0.8%), but it does not suggest a crisis.

Jean-Claude Trichet, president of the European Central Bank, said in an interview with French newspaper La Monde that second-quarter growth was coming in higher than expectations. New industrial orders were up 5.2% in March over February and 19.8% up on March 2009. Inflation remains under control. The biggest problem is consumer spending, which will need to improve before recovery can take hold. Sentiment indicators issued at the end of the month showed the sharpest dip in consumer sentiment since 2008. As such, there is plenty of reason to be pessimistic about the outlook for the continent.