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No Recovery in Sight in Europe

Richard Cox

NEW YORK ( TheStreet) -- The eurozone debt crisis continues to display its lingering effects, creating the longest period of economic weakness in the region in the postwar era.

For the sixth consecutive quarter, gross domestic product in the 17-member eurozone contracted, as data released Wednesday showed declines of 0.2% for the first three months of 2013. On a yearly basis, that equates to a drop of 1%.

The report showed that most countries were weak; only Germany managed to show a small gain in output (+0.1%) for the quarter.

With strict rules in place under government-imposed austerity programs, difficulties in bank lending and burdensome levels of household debt, a recovery is not in sight. All of this is weighing on the euro, which is likely to drop even further.

Official Outlook

The majority stance at the European Central Bank (ECB) is that the region will return to growth before the end of the year. But weak business surveys challenge that forecast, and there is little to suggest that fiscal austerity and institutional reforms are working.

Consumer confidence surveys are discouraging, as well, removing a key driver necessary for a sustainable recovery -- at least near term.

Efforts by the ECB -- including reducing interest rates to historic lows, providing liquidity to banks, and pledging to back eurozone government bonds -- have helped resolve the sovereign-debt panics of the last few years.

There is now less worry of a eurozone breakup and regional stock markets have rallied in recent months. The German DAX, French CAC 40, and the Spanish IBEX 35 are all trading near their highs for the year. But the recovery in the stock and bond markets hasn't helped business investment or the job market much.

The GDP numbers don't back up investors' confidence. That makes stocks and bonds vulnerable. The euro currency itself, with its meager 0.5% carry value, only adds to Europe's negative prospects.

Global Perspective

The eurozone's recession contrasts with recoveries around the world. In the U.S., GDP grew 2.5% in the first quarter. In Japan, GDP grew 3.5% in the quarter, and output in the U.K. also rose.

The interest rate in the eurozone is only 0.5%, and so the euro is no longer a high-yielding asset, reducing the incentive for investors to buy and hold the euro for long periods of time.

The lows for the year in the EUR/U.S. dollar are in the 1.2750 region, and it looks as though another test of this area will come before the end of the second quarter.

To play this expected weakness, investors should consider selling the CurrencyShares Euro Trust or buying the PowerShares DB US Dollar Index Bullish .

Given recent GDP numbers output and central bank policies in the U.S. and Europe, the U.S. dollar is likely to continue to post gains against the euro into the third quarter and post new yearly lows in the EUR/USD in the process.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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