European stock prices have recovered some of the steep losses of the last several months, though investors remain concerned over the severity of the sovereign debt crisis in Greece and other countries. Several European governments have adopted austerity measures that could dampen growth and forestall a full economic recovery. Tenerelli points out that fears about defaults and stymied growth are overstated. He shares that while problems in Europe are likely to persist, many measures that have been implemented to help Europe recover will have a positive long-term effect.

• To cope with its sovereign debt crisis, Europe faces a period of fiscal austerity and slower growth. So far, the cuts in government spending are equal to 0.6% of gross domestic product (GDP) in 2010 and 1.2% in 2011.
• Further cuts are expected in France and Germany, though these reductions are not likely to be as severe as in Greece or Spain.
• Evidence suggests that 30% to 40% of the cuts announced or implemented thus far can be mitigated through the liberalization of the labor markets, an improved business environment, and greater consumer confidence.

• In economic terms, Greece remains the most troubled European country. However, the fiscal imbalances in Europe as a whole are less severe than in the U.S. The European Union (EU) budget deficit should peak this year at 6.7% of GDP, compared with 10.7% for the U.S.
• The EU and the International Monetary Fund have implemented a robust €750 billion (nearly $1 trillion) plan to backstop funding for all euro zone economies if needed, while the European Central Bank has begun purchasing sovereign bonds where a lack of liquidity and irrational pricing exist. These measures will help stabilize the economic situation.
• While Europe will generate slower GDP growth for several years, key factors will help the euro zone improve its economic fortunes. A weaker euro will stimulate export growth, while low interest rates should boost consumer expenditures. The global economic recovery, particularly in emerging markets, should also help European expansion.

• At this time, we do not believe that the stability of the overall euro zone is in jeopardy.
• Discussions about labor reform in Spain and privatizations in Greece are encouraging signs that governments will take the actions necessary to improve their budget situations.
• As a result of the fiscal and monetary measures being taken, we believe that the outlook is more favorable than the prevailing investment sentiment suggests and that European equity markets are extremely cheap. Valuations based on expected earnings are at their lowest levels since the 1980s.
• European companies have also navigated the crisis well. They have acted quickly and efficiently to manage their costs and profit margins.