Slow-motion recovery in the eurozone

"Down in the undergrowth of Europe's economy, something is stirring", says Victoria Bryan on Reuters. The eurozone exited a two-year recession in the second quarter, and since then there have been signs of economic recovery.

Spain, at the centre of the crisis in the past few years, managed growth of 0.1% in the third quarter. Germany and France no longer lead the rebound in service and manufacturing activity, notes Ralph Atkins in the Financial Times.

In Europe as a whole, business and consumer sentiment have risen steadily since April.

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Stuck in low gear

It still points to expansion, but is consistent with pretty paltry growth of 0.2% in the fourth quarter. And GDP growth is unlikely to accelerate any time soon.

On the plus side, the absence of panic over the past 18 months has buoyed confidence, while easing up on austerity measures is also helping.

According to figures from the International Monetary Fund, the drag on growth from government spending cuts will ease from 1.3% of GDP in 2011-2013 to 0.3% in 2014. Meanwhile, global growth, while unspectacular, has remained steady.

But there are several obstacles ahead. One is high unemployment, often a result of rigid labour markets, which discourages hiring at the beginning of an upturn, notes Markus Beyrer of Businesseurope, the EU's largest employers' lobby group. This in turn keeps a lidon consumption.

Many European states also have yet to deregulate their goods and services markets in order to boost their economies' long-term growth potential. Such reforms pay off in the long run, but they are painful to push through, and vested interests continue to dig in their heels.

Another problem is the ongoing credit squeeze. European firms rely heavily on bank funding, yet bank lending continued to shrink in September. Europe's banks, which unlike their US counterparts have been reluctant to recognise and write off dud loans, remain short of capital and loath to take on further risk.

Then there's the sheer weight of private debt in the eurozone, adds The Economist. For all the furore over government debt in Europe, household and corporate debt combined were worth well over 200% of GDP in Ireland, Spain and Portugal before the crisis, compared to 175% in the US or 205% in Britain. Indebted households are reluctant to spend and there are too many "zombie companies much like those" seen in Japan in the 1990s.

A strengthening euro, meanwhile, creates another obstacle to growth as it makes exports dearer, and growth looks set to stay too weak to make a serious dent in unemployment and debt piles in the periphery.

Moreover, "reform fatigue has befallen the crisis states", says Wolfgang Mnchau in the FT. So political turbulence, debt restructuring in the periphery and further jitters in European bond markets look probable at some stage. The crisis is being managed rather than fixed.

What's next for stocks?

Furthermore, valuations are much more reasonable in Europe, with cyclically adjusted price/earnings (Cape) ratios at historic lows.

We think that in Italy the Cape of just over seven is low enough to discount potential problems ahead, making the iShares FTSE MIB ETF (LSE: IMIB) worth a look.

Similarly, those inclined to make a long-term bet on a Spanish recovery can play the US-listed iShares MSCI Spain Capped ETF (NYSE: EWP). Spain's Cape is just below nine.