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Europe: Still a slow-moving train wreck

March 26, 2013: 11:33 AM ET
Europe has been in crisis mode since 2010. This economic train is eventually going to run out of track.

Europe has been in crisis mode since 2010. This economic train is eventually going to run out of track.

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.

Now that it looks like Cyprus won't be leaving the eurozone, investors should not forget that the continent has bigger problems.

Sure, Cyprus yielded about a week of scary headlines, but the Cyprus obsession served as a distraction from the real story: much of Europe is still an economic mess that has nothing to do with Russian bank deposits in the tiny island nation. There never was a silent C for Cyprus in the PIIGS acronym of troubled European nations that actually matter.

Related: The worst is yet to come for Cyprus

Stocks did pull back Monday, after an initial celebration of the Cyprus bailout. It was a pretty mild sell-off though. And the market bounced back a bit Tuesday.

But here's why you still need to be worried about Europe.

The most recently available unemployment rates in Greece, Spain and Portugal (which last I checked are all a tad bigger than in Cyprus) were 26.4%, 26.2% and 17.6% respectively.

The average for the 17 nations that use the euro currency is 11.9%. To put that in perspective, the U.S. unemployment rate is only 7.7%, a level that is still rightfully considered uncomfortably high. Unemployment is at least falling in the United States. In Europe, the jobless rate is higher than a year ago. Europe is getting worse, not better.

"The main problems in Europe have not disappeared, particularly in Italy and Greece," said Ashraf Laidi, chief global strategist with City Index Ltd. in London, adding that so far, it seems European politicians only act aggressively at the last minute.

Related: Cyprus banks still closed after bailout

According to estimates from Eurostat, the eurozone economy is expected to shrink 0.3% this year. That follows a 0.6% contraction in 2012. What's more, GDP is only expected to "rebound" by 1.4% in 2014.

It's clear that austerity is not helping the most problematic economies in Europe. Voters are not happy either, as witnessed by the backlash against the party of Italian prime minister Mario Monti in recent parliamentary elections. That's left Italy, the third-largest economy in Europe and the third-biggest bond market in the world, without a government. As they'd say in my ancestral homeland, non va bene!

And even "stronger" euro nations like France, the Netherlands and Germany are getting dragged down. Eurostat is predicting essentially no economic growth in France this year and a decline in GDP for the Dutch. Germany's economy is expected to grow by just 0.5% this year.

Heck, one could argue that the only reason the euro is holding up as well as it has against the U.S. dollar over the past few months is because of Germany.

Resentment among the northern European countries seems to be running high and that could intensify.

Reports that Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem said the Cyprus bailout, which will tax large bank depositors at the nation's two top banks, could be a "template" for the rest of Europe spooked investors Monday. A spokesperson for the Eurogroup denied the comments but the damage was done.

Germany is likely to remain vehemently against substantial increases in aid for the laggards of Europe as well. After all, German chancellor Angela Merkel faces an election in September.

Clearly, the haves in Europe would rather that the have-nots get more "bail-ins" as opposed to bailouts.

That's a huge problem. One of the biggest criticisms of the European Union is that the second part of that name is sort of a joke.

"What we didn't like in Europe at the start of 2012 is still going on today. The right hand is doing one thing and the left is doing another. There is no true fiscal unity," says Eli Butnaru, CEO of Mora Wealth Management in Miami. "Structurally, nothing has been done to increase productivity. Austerity is not the answer."

There are still big questions about the stability of the banks in the so-called peripheral nations of Europe as well. Shares of Spain's Banco Santander (SAN) and BBVA (BBVA), the National Bank of Greece (NBG) and Italy's UniCredit (UNCFF) have not participated in the global stock market run-up this year. In fact, neither have the stocks of banks in healthier European nations, such as Deutsche Bank (DB), ING (ING) and Societe Generale (SCGLY).

That is troublesome too. As the United States learned during the Great Recession, it's hard for the markets and economy to function normally without a healthy banking system.

"TARP is a four-letter word, but the injection of bailout funds to banks in the U.S. definitely helped the economy recover faster even though it risked taxpayers' money," said Scott Colbert, chief economist of Commerce Banschares (CBSH), a Kansas City, Mo.-based bank that did not take TARP funds. "There is no master plan to recapitalize European banks and there seems to be no political will to do so."

Related: Sheila Bair: It's time for a European FDIC

At some point, European leaders really have to address the problems more directly instead of with a piecemeal strategy.

"The sovereign debt crisis in Europe has been an excruciatingly slow-moving wreck since 2010," said Wasif Latif, vice president of equity investments with USAA in San Antonio. "The worst may be off the table, but we are not out of the woods yet."

To quote British rock band (and guilty pleasure) Muse, "this chaos, it defies imagination." Fortunately, the market has not yet completed the lyric and "arrived at panic station." But more market sell-offs are inevitable as long as Europe does not take the crisis seriously.

The eurozone collectively is the world's largest economy. Investors can't continue to glibly dismiss Europe's woes as an isolated problem.

"This is an interconnected global market where money moves fast. Every time there is a new flare-up in Europe, there is reason for concern," Latif said.

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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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