Why Europe Still Matters

We have a busy economic calendar on the home front today, but initial trading action will likely reflect optimism on the European situation following favorable comments from China about its plans to invest in Europe. We also have fourth quarter GDP numbers for the Euro-zone region, which shows that the French and German economies did modestly better than expected. But the overall outlook for the region’s economy is fairly grim.

The domestic economic reports on deck for release today include Industrial Production numbers for January and minutes of the last FOMC meeting.

The consensus view for the Euro-zone region is that its economy will experience a recession in 2012. It appears that the downturn got underway from the fourth quarter of 2011. With 9 of the group’s 17 countries experiencing economic contraction in the quarter, the group’s fourth quarter GDP dropped 0.3%, the first negative growth since the second quarter of 2009. The U.S. economy accelerated to a 2.8% growth rate in the same time period, though its growth pace is expected to decelerate in the first quarter of 2012.

The technical definition of a recession is two back-to-back quarters of negative economic growth. Italy, Greece, Portugal, Belgium and the Netherlands already meet that condition, while Spain is almost there as well.

The French and German growth numbers came in better than expected. The German economy contracted in the fourth quarter, but is expected to post positive growth in the current quarter. But modest German growth won’t be enough to offset the impact of spending cuts in the southern European nations, ensuring negative group-wide GDP readings at least through the first half of the year.

Greece, the "ground zero" of Europe’s troubles, is in a particularly terrible situation. Its economy has contracted a cumulative 17% in the four years through the end of 2011. The country has just agreed to go through a substantially tougher austerity plan to ensure a fresh bailout. The latest austerity measure will see 15,000 public sector job cuts and a 22% cut in minimum wages.

The thinking behind the tough fiscal medicine for Greece and other Euro-zone countries is that these measures will help restore confidence in the region’s finances, which will eventually result in economic growth. Left-leaning political forces are contesting the utility of this thinking, with the French presidential election in April providing a critical platform for the debate. French president Nicolas Sarkozy is trailing his socialist opponent in the polls at present. His defeat in the April election would be a major setback for the prevailing policy prescription, as he and German chancellor Angela Merkel have been its strongest proponents.

On the earnings front, we have better-than-expected results this morning from Comcast ( CMCSK - Snapshot Report ) and Deere ( DE - Analyst Report ) . Zynga ( ZNGA - Snapshot Report ) posted better-than-expected results, but provided a weak outlook. In other news, Kellogg (K) is acquiring Procter & Gamble’s ( PG - Analyst Report ) Pringles business for $2.7 billion. Procter & Gamble was initially planning to sell this business to Diamond Foods ( DMND - Analyst Report ) , but the deal couldn’t go through because of Diamond’s problems.