A Rough Road Ahead for Europe in 2013

Europe could use a hug.

The past few years haven't been kind to the continent, highlighted by runaway unemployment, countries rumored to be leaving the eurozone, out-of-control debt, and political feuding among EU member nations. Investors worldwide are hoping for an end to the region's ongoing fiscal crisis.

Unfortunately, 2013 does not look to be the comeback year. While there's no telling whether the worst is over yet, the continent's economy isn't headed for a real turnaround over the next 12 months -- and that same sluggish European recession we've all gotten used to will continue to drag on.

A nightmare of contraction
Take the bad news straight from the European Central Bank itself. The ECB doesn't paint a rosy picture of European growth, projecting a GDP contraction of 0.3% for the 2013 full year. That's slightly better than what the ECB is estimating for 2012's full-year figure, but it still indicates that the economic storm will continue through the near future.

Depending on where in Europe you look, things could be much better or far, far worse. Germany, the closest thing the eurozone has to a leader, is still managing growth through the worst of times. The country's strict adherence to responsible fiscal policy has spared the continent's largest economy from most of Europe's woes so far. The IMF projected 0.9% GDP growth over the course of 2013 in its World Economic Outlook, and investing there could be a wise move. Last year, Germany's stock market, the DAX, significantly outperformed the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , which gained about 10% including dividends.

Not so for the rest of Europe. The debt-plagued nations of the European periphery face far more troubles in 2013. Citigroup (NYSE: C  ) predicts that Italy, the third-largest economy of the eurozone, will face economic contraction of more than 1% over 2013. And with the IMF projecting the country's public debt to swell to 128% of GDP this year, it's not looking good for Italy.

The two debt-torn nations of the Iberian Peninsula seem to be headed for even more dire straits. The IMF can't even agree with some economists on whether or not Portugal needs debt restructuring. Meanwhile, the nation still faces 1% GDP contraction this year, according to the World Economic Outlook. Spain, locked in a horrific unemployment crisis that doesn't look set to ease up soon, is in a truly desperate situation. The country has managed to sell bonds and recapitalize its banks, but contraction is still coming this year -- and any significant problems in other countries (e.g., France and Italy) that would draw the ECB's attention away from Spain could really hurt.

Employment and austerity measures at odds
Spain's employment picture won't see any meaningful progress this year. Continued austerity measures mean that businesses are in a precarious position in Spain. There are precious few consumer dollars to go around with unemployment higher than 25% (and youth unemployment beyond 50% -- yikes).

Austerity couldn't come at a worse time for Europe, however. While Germany continues to press other European nations to cut spending, stimulus measures ramp up across the world. The United States and Japan are using "quantitative easing" freely, which won't help Europe at all -- particularly with China rumored to be considering more stimulus as well. A continuation will see the euro appreciate right when the region needs a weaker currency and more foreign investment. This combination of reduced foreign investment and tightened government spending will hammer European citizens and economies this year.

To be fair, Europe has to rein in its debt. The region is forced into a no-win gambit: If member nations keep spending, public debt will spiral out of control, meaning that any clean-up operation in the future will hurt that much more. But with the international community going in the other direction, Europe's present isn't any less painful.

Greece is a mess, and it doesn't help when youth and businesses are fleeing the country. Coca-Cola Hellenic's (NYSE: CCH  ) choice to leave Greece for greener pastures in London leaves the Greek stock market without 20% of last year's capitalization. Meanwhile, the flight of Greek citizens abroad robs the debt-ridden country of much of its future productive citizenry. Without its youth, Greece will have a hard time providing for its future as the eurozone at large demands further budget-tightening.

It's all tough to take in for investors. But there are still stocks and companies to invest in, even as Europe's economies are set to be slammed this year.

Where to invest in Europe
When looking for bright spots in Europe in 2013, be sure to favor companies that are well-diversified overseas.

Consider strong, well-established business such as French pharmaceutical company Sanofi (NYSE: SNY  ) . While Sanofi is based in a nation with an uneasy economy, the company's sales come from across the world. Sanofi has seen revenue grow consistently in its largest business segment, even with the eurozone under fire. However, Sanofi's sales in Europe trail those of the U.S., and the company boasts a substantial presence in Japan and emerging markets, protecting the company and its investors somewhat from the Old World's woes.

Looking for quick turnarounds won't give you that same sort of safety net. Floundering European bank stocks, such as the National Bank of Greece (NYSE: NBG  ) , are a losing game. Secure European financial companies such as Banco Santander (NYSE: SAN  ) are an exception: Like Sanofi, Santander has a large global footprint, with subsidiaries in Latin America. The National Bank of Greece is not such a safe bet.

With Europe's economy battling to stay afloat, there's no reason to take a wild gamble. Stick with what's safe until this storm is over.

Don't expect a European miracle
Europe won't be fixed overnight. While there are glimmers of hope for the region, many of its strongest economies still battle high public debt and surging unemployment. With GDP contracting and keeping Italy, Spain, and others in recession, don't expect any miracle for the region this year. Keep your European investment where you can trust it: in safe stocks and well-diversified winners. Risky short-term moves are bound to fail as Europe continues to plod through the recessionary mud in 2013.

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