Don't Get Too Excited Yet About Europe's Rebound

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Strong signs emerged Thursday that the European economy has rebounded from the Greek debt crisis in April and the subsequent contagion that spread to other countries like Spain, Ireland and even Italy. But as with so many indicators these days, the picture isn't really so clear cut. And in this case, some analysts are warning that Europe's apparent bounce-back could prove to be short-lived.

Among the promising developments: The European Commission said its indicator of economic sentiment for the 16-nation euro currency area hit a 28-month high of 101.3 in July, up from an upwardly revised 99 in June. Analysts polled by Reuters had expected the number to be around 99.

At the same time, German automaker Volkswagen said sales surged by 21.9% in the second quarter, while engineering conglomerate Siemens reported a 40% increase in profits amid booming new orders. "We see solid growth across all parts of our business," said Siemens CEO Peter Loescher.

The euro also got into the act, hitting 1.309 to the U.S. dollar, its highest point since May 10. That followed adoption of a two-year austerity plan by Italy's lower house of parliament.

"If you compare recent developments in the euro zone with those in the U.S., I think things are looking surprisingly good in Europe, better than we would have thought just a couple of months ago," says Jennifer McKeown, European economist at Capital Economics in London.

"In a Party Mood" in Germany

But McKeown cautions that most of the goods news is coming from Germany and other core European nations like Belgium and the Netherlands, where exports are booming. The so-called peripheral countries like Greece, Spain and Portugal are still mired in a poor economic situation, she says.

Hans Redeker, head of foreign exchange strategy at French bank BNP Paribas, notes that the surging sentiment in Germany is almost entirely due to the improvement in the export sector. German shipments to the U.S. have risen from $5.1 billion per month to $7.8 billion in the last quarter. But he says such big numbers are unlikely to last given the slowdown in the U.S. economy.

There was jubilation in Germany last week when the Ifo business climate index, from the Ifo Institute for Economic Research, shot up from 101.8 in June to 106.2 in July. "The German economy is in a party mood," said Hans-Werner Sinn, Ifo Institute president.

But Redeker says the Ifo report may have been misleading. "Europe has recovered from the April and May crisis, but not because of domestic demand, it's all on the basis of exports," Redeker says. "If we're not able to transform this success in exports to better performance on the domestic demand side, this is going to turn out to be a very short-lived boom."

"A Very Painful Period"

BNP Paribas is forecasting that German month-over-month growth, which hit 1.5% in the second quarter, will decline to 0.5% in the third quarter and possibly as low as 0.3% to 0.2% in the fourth quarter.

McKeown says she doubts that the euro's rise will endure. Its recent gains were due to an easing of fears that Greece or Portugal might default on their debts and to widespread relief in the markets that only seven of 91 major European banks failed to pass a stress test last week to see if they had enough capital to survive a financial crisis.

"The recent increase in the euro is unlikely to last as fiscal tightening really sets in and as the peripheral economies suffer more and more," McKeown says. "Regardless of whether they are going to default in the short term, they face a very painful period which will see them in recession for quite a while."

Also worrying economists is that the three-month Euro Interbank Offered Rate (the interest rate European banks pay to borrow from each other for three months) has been inching up, a sign of continuing stress in the Continental financial system despite the good results from the stress tests. The so-called Euribor rate rose to 0.899% on Thursday, its highest level in a year.

It'll take several more months -- and a lot more solid evidence -- before Europe can really claim to be on the mend.

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