Euro Zone: Disaster or Recovery in Sight?

Despite a better first quarter than expected in the stock markets, opinion is still divided on the fate of the euro zone.

E.U. Flags
Photo: Ken Sciciuna | Getty Images
E.U. Flags

“We are heading towards absolute disaster,” Roger Nightingale, economist, RDN Associates, told CNBC Monday.

“You’ve got someone with a pimple and a broken leg, and you’re standing on his broken leg to fix the pimple,” he said about the measures taken to mend Europe’s banking system, while the euro zone is expected to enter recession again this year and unemployment is at its highest since the single currency was introduced.

“Half the countries in Europe seemed to have a negative last quarter (of 2011), and the first looked worse. I’m amazed that so many people are talking about recovery,” he added.

Actions by euro zone policymakers, including the European Central Bank’s mass liquidity injections, have helped to somewhat restore investors' confidence in Europe this year. European finance ministers announced on Friday that they have raised the combined lending ceiling for their two bailout funds – also known as the firewall - to 700 billion euros and that its total firepower will be around 800 billion euros ($1.06 trillion).

“The European picture is fairly straightforward. If the euro zone gets through this rocky year, next year there will be less austerity, Italy and Spain will start seeing the fruits of austerity reform, there’s likely to be a comparatively good performance,” Holger Schmieding, chief economist, Berenberg Bank, told CNBC Monday.

“This adds up to equities being a good bet, while government bonds in the core countries may not be for the rest of this year,” he added.

While market focus has been trained on Greece and Spain for most of the year, Schmieding believes the real risks lie in France, the region’s second-largest economy, where President Nicolas Sarkozy is facing elections this month.

“France is the one big risk to watch in Europe. It’s the one economy which still needs a wake-up call. All other significant economies are already on the step to overhaul,” he said.