In the past one year, European stocks have underperformed their American peers. The chart below compares the performance of France CAC, Germany’s DAX, and European Stoxx with that of the S&P 500.
The same trend has been true with the euro, which has fallen against major currency peers. The chart below shows its performance against the dollar, Aussie, yen, and sterling. This article will look at a number of reasons why the European economy continues to struggle.
First, there are concerns that the region’s regulators have introduced many regulations that have prevented or reduced investments. Last year, the region implemented the MIFID II regulations, which targeted the financial sector. This was followed by the General Data Protection Regulation (GBPDR), which targeted all companies that collect user data. The region is now planning to move into copyright protections, which could affect companies like Google and Facebook. There are many more regulations coming from the region and investors fear that may affect the performance of companies. This is also a divergence because United States is currently going through deregulation.
Second, the region has been in conflict with the United States, which is one of its biggest trading partner. Last year, Donald Trump postponed the auto tariffs after meeting with Jean-Claude Juncker. This year, he received a report that likely recommended tariffs to the vehicles. This is a big issue that could affect the region’s economy. In addition, the president has criticized the region’s defense spending and on the Iran nuclear deal. Therefore, this conflict has not been a good thing for the European Union.
Third, the European Central Bank (ECB) has continued to maintain ultralow interest rates. While this is a good thing for borrowers, it has affected the investment returns of investors. This is especially more to those in the financial sector. Partly, the ultralow rates have led to the struggles facing Deutsche Bank, one of the largest bank in the region. In fact, the performance of European banks has trailed that of their American counterparts.
Fourth, Brexit is a major issue right now. Since June 2016, the region has been grappling with how the United Kingdom will leave the EU. These problems have increased as the UK seems confused about what it wants. Last week, after rejecting a deal proposed by Theresa May, parliament voted to avoid a no-deal Brexit. As such, no one knows how the country will leave because May’s proposal isn’t likely to pass parliament. This leads to uncertainty because investors are afraid about making investments in the region.
Fifth, the region has continued to face political pressures. Last year, Angela Merkel announced that she will not run in the next election. At the same time, Italy is currently being ruled by populists, who aim to change the country while France has seen protests against Macron intensify. There are disagreements between the EU and Hungary and Poland too.
All these factors has led to the region’s economy to be sluggish. In fact, its economy has continued to shrink as shown in the chart below.