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Europe's financial winter isn't over

February 5, 2013: 1:03 PM ET
Punxsutawney Phil may not have seen his shadow. But financial groundhogs in Europe would be wise to head for cover.

Punxsutawney Phil may not have seen his shadow. But financial groundhogs in Europe would be wise to head for cover.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

I realize that Groundhog Day is mostly an American phenomenon. But if there were any furry, prognosticating rodents peeking out of their holes in Europe over the weekend, they probably didn't like what they saw.

Madrid Mariano and Milan Mario would have witnessed an enormous shadow. Let's be honest, there are probably six more weeks (if not more) of economic winter for the troubled eurozone.

European stock markets plunged Monday due to concerns about alleged corruption in Spain's government and worries about banking problems in Italy. With Italy facing key elections in a matter of weeks, and the popularity of the Spanish government plummeting, investors may have reason to fear a dilution of fiscal reforms that have helped boost confidence in European markets.

But even if you toss those worries aside -- and investors in Europe and the United States seemed willing to do that Tuesday with stock prices moving higher again -- there is still plenty to be nervous about in Europe.

Sure, the euro currency crisis may be over for now. The euro is hovering around $1.35. That's actually just 15% below its all-time high from 2008. Nobody's talking about parity with the dollar anymore. And predictions of an imminent break-up of the currency are waning too. (Farewell "Grexit." We hardly knew ye!)

Related: Europe's next challenge: A strong euro

Retail sales in the eurozone (i.e. the 17 nations that use the euro currency) plummeted in December. For the full year, the volume of retail trade fell 1.7%.

Unemployment remains disgustingly high. It was 11.7% in December for the euro members. In Spain and Greece, the jobless rate is above 26%. With many European nations still trying to fix their economies through budget cuts and higher taxes, as opposed to measures to stimulate growth, it's hard to imagine how consumer spending and the labor market can turn around anytime soon.

"The economic concerns have not gone away. In the beginning of the year, there was a consensus belief that we got past the fear stage in Europe and we were moving back toward growth," said Frances Hudson, global thematic strategist with Standard Life Investments in Edinburgh, Scotland. "But when you say 'austerity', people feel terrible."

What's more, several big European banks across the continent -- such as Santander (SAN), Deutsche Bank (DB) and UBS (UBS) -- have all recently reported dismal results.

Hudson said confidence is still fragile and that it might not take much to rattle investors again. Political problems in Spain could force the government to ask for more help. Investors were able to deal with the fact that big Spanish banks needed aid, but a full-blown Spanish rescue might be a different story.

"If Spain does actually have to request a bailout, it could expose flaws in the system," she said.

Related: Dutch bank rescue shows Europe's problems continue

The fact that a significant chunk of Europe is in recession is troublesome news for other developed nations as well as for emerging markets. As long as Europe's woes continue, it will be difficult for Europe's largest trading partner, China, to start growing more rapidly again. A slowdown in China, combined with Europe's malaise, will put more pressure on the United States, which is hardly a picture of economic health either. Don't even ask about Japan.

For those reasons, Hudson thinks that global stock markets should cool off after a torrid January. She said that economic growth is not strong enough around the world to justify the types of earnings increases that investors are clearly expecting this year.

European markets have been climbing higher. But investors may be getting too optimistic.

So is there near-term hope for Europe on the horizon? The European Central Bank holds its next policy meeting on Thursday. But it's unlikely that ECB president Mario "whatever it takes" Draghi will cut interest rates just yet. Still, if Europe's economy continues to flounder, Draghi might have to reverse course.

There are already growing concerns that the euro might be too robust and that the ECB should be joining the Bank of Japan, Federal Reserve and other central banks in the Great Global Easing party. A rate cut could weaken the euro. While that would probably be viewed as yet another shot fired in a currency war, it could also help the struggling manufacturing sectors of France, Italy and others. Still, until Draghi hints that he's willing to change gears, investors might need to be nervous.

Related: No retreat from austerity for Europe

Paul Christopher, chief international strategist with Wells Fargo Advisors in St. Louis, wrote in a report Monday that "policy mistakes" by the ECB were a significant risk. He noted that the ECB's "more restrictive policy" could lead to even higher bond rates and a stronger euro ... which will make it even tougher for European companies to compete with American, Japanese and Chinese competitors.

The good news about Europe, if you want to call it that, is that the worst is probably over. But that doesn't mean it's time to celebrate.

"We are not expecting much of a recovery in Europe this year," said Alexander "Sandy" Cutler, CEO of Eaton (ETN), a Dublin-based manufacturer of industrial components. (Eaton had been headquartered in Cleveland but recently incorporated in Dublin after its purchase of Irish electrical equipment maker Cooper Industries.)

"Europe is struggling with the same issues of debt as other developed markets. Growth will be slow. A fiscal crisis s not going to be resolved in just a year's time," Cutler added.

Try telling that to investors though. They seem to think that Europe's economy and stock market have already emerged from the cold.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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