Recovery

The Debt Crisis in Europe May Be Overblown


Europe is a mess. That's been the message trumpeted in headlines for months. Ajay Banga doesn't see it that way. "It's almost like a tale of two Europes," says the incoming chief executive officer at Purchase (N.Y.)-based MasterCard (MA). "We read about debt crises and sovereign debt issues. I don't see any real impact yet," he says, citing data that show European consumers and executives are still using their cards to spend on travel and entertainment.

The optimism of executives like Banga suggests the 16-nation euro economy may avoid sliding back into recession. Many economists have been pessimistic about Europe as its governments struggle to contain record deficits. Yet European companies have already cut costs and wooed new customers from abroad. They are getting an export boost from an 18 percent drop in the euro's value against the dollar. Volkswagen, Europe's top carmaker, said on June 16 that the euro's decline is helping sales abroad and that operating profit and deliveries may rise "significantly." The euro's fall may benefit sales of the Golf compact, VW's global bestseller, which is made in its Wolfsburg (Germany) plant. Spurred by demand for goods such as car engines and steel, European industrial production rose 0.8 percent in April, better than the 0.5 percent forecast.

Europe's good fortune is helping U.S. companies operating on the Continent. David J. Bronczek, CEO of FedEx Express, says FedEx itself, the world's biggest air-cargo carrier, has "seen solid growth in Europe." Ronald J. Pasek, chief financial officer at Altera (ALTR), the San Jose-based maker of programmable semiconductors, says Europe's debt turmoil doesn't "fundamentally affect what we're seeing right now, which is good news." Altera's chips are used by an array of manufacturers, so its business is a reliable barometer of industrial production.

These signs of life are helping to stabilize the shaky bond markets. Spain saw strong demand for a 30-year bond on Mar. 17, easing concern that the Spanish government will struggle to finance its debt. "As we get more good than bad news, the fear of a double-dip recession is going to evaporate," says Erik Nielsen, chief European economist at Goldman Sachs (GS) in London. His forecast of 1.4 percent euro-area growth this year is stronger than the 1.1 percent median prediction of economists surveyed by Bloomberg News. "People are still bearish," adds Nielsen, "but will come around."

The bottom line: Economists may be overdoing the gloom on Europe. Businesses report good results in the region. The drooping euro could help.

Feld is a reporter for Bloomberg News.
Thesing is a reporter for Bloomberg News in London.

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