Headlines from Europe are causing losses in financial markets in the U.S. today. According to the European Union's statistics office, output in the 17 countries sharing the euro shrank 0.3 percent in October to December from the third quarter. While the uncertainty over a Greek debt deal may be an even bigger factor in the declines in the financial markets, concerns about the sinking European economy are contributing to the decline.
The monetary stimulus provided by the ECB has kept the European banking sector afloat and held down interest rates for sovereign debt, but has not provided a meaningful boost to economic activity. When reports on January through March economic activity are issued, it seems almost certain that further declines will be reported. The almost month long cold snap the began during the last week of January sapped economic activity in the eastern countries of the Euro zone. In particular, tourism and shipping declined due to the cold and snow. While the western countries of the Euro zone, including France and Germany, escaped the brunt of the cold and snow, they still felt the impact of higher energy costs due to high demand across Europe. The high heating bills during the cold snap were Euro zone wide and the reduced economic activity impacted a significant number of the member countries
The negative impact on economic activity from the cold snap, the higher cost of oil this quarter, and reduced government spending resulting from austerity budgets will combine to weaken first quarter economic activity in the Euro zone. The economic forecasts predicting a mild recession in Europe may be overly optimistic, at least in their predictions for the 1st quarter. Be very wary of the impact of the European recession on U.S. financial markets. So far, the weakness in the Euro zone has not spilled over into the U.S., but continued de-coupling is by no means assured.