Economy Watch: New Year, Same Old Nervousness in Euro Zone

By Dees Stribling, Contributing Editor

Jan. 1, 2012 happened to be the 10th anniversary of the introduction of the euro as a circulating currency, but there was little celebration on that account in Europe over the holiday weekend. That contrasts to Jan. 1, 2002, when common-currency optimists shot off fireworks over the European Central Bank headquarters in Frankfurt.

More recently–on Friday, in fact–Spain announced that its current austerity measures have been enough to prevent a larger-than-expected budget shortfall for 2011, when all the numbers are crunched. The answer to problems of this kind? More austerity–at least that’s the pronoucement expected to emerge from a meeting of German Chancellor Angela Merkel and President Nicholas Sarkozy on Jan. 9 to discuss the new fiscal treaty they suggested–practically demanded–for the euro zone in December.

As the new year begins, the talk of the next European recession continues apace. In fact, that part of the world might already be suffering from a contraction. Recently, the Organization for Economic Cooperation and Development predicted that the euro zone economy would shrink by 1 percent during the fourth quarter of 2011, and maybe 0.4 percent during the first quarter of 2012. Other prognosticators foresee a larger decline in store for 1Q12, and a few (or maybe more than a few) say the continent is still in the early throes of a “lost decade,” not to mention some anti-austerity riots when winter is over.

As for the euro-zone’s impact on the U.S. economy, opinions are mixed, as they tend to be among economists and economy-mined observers. One school of thought has it that the direct impact will be limited, since U.S. exports to Europe are important, but not front-and-center vital to domestic economy health. Less sanguine observers point out that the baneful effects of contagion shouldn’t be underestimated–and all bets are off if Greece renounces the euro or Italy or Spain defaults on their debt.

Wall Street had a middling year

Wall Street ended down on Friday, depending on the exchange. The Dow Jones Industrial Average lost 69.48 points, or 0.57 percent, while the S&P 500 was down 0.43 percent and the Nasdaq declined 0.33 percent.

But that was just for the last trading day of the year. For the entirety of 2011, the Dow did well enough: up 640.05 points, or 5.53 percent. But even with that finish, at 12,217.56, the Dow didn’t end the year nearly as high it was during the period from May through July, when the index flew above 12,500. That upward swell ended toward the end of July with the debt-ceiling scare and the subsequent  U.S. debt downgrade. Through most of August through September, the Dow was down quite a lot, hovering just above 11,000, but it recovered nicely beginning in October (which is against stock market traditions, but never mind).

The more broadly based S&P 500 practically broke even in 2011, ending the year down by a scant 0.04 percent. It too took a hit in late July when Congress seemed on the verge of blowing up the world economy, but the index never bounced back quite as much as the Dow. As for the Nasdaq, it lost 1.8 percent for the year, suffering the same summertime blow as the other two indices, along with a brief plunge around the time Steve Jobs died. The Nasdaq never quite recovered from these hits.

The biggest Dow-listed loser on the Big Board last year? Bank of America, whose stock price declined 59 percent for the year, as the company was vexed by seemingly endless problems related to its ill-timed acquisition of Countrywide, costs associated with bum mortgages, “a lack of confidence in management” (as news reports politely put it), and as the rotten cherry on top of the melted sundae, some millions of retail customers irate about BofA trying to impose debit-care fees not long ago. Yet it wasn’t the only sizable banks with troubles this year: the KBW Bank Index lost 25 percent for the year.

The biggest Dow winner in 2011? McDonald’s Corp., up 31 percent year-over-year. After all, consumers who spend, say, $5 at McDonald’s each month got something tangible in return, not the sense of being nickeled and dimed by a financial behemoth.