Today’s weaker than expected EuroZone GDP is a sign that growth in Europe will remain below trend for quarters if not years.   The WSJ reports:

Gross domestic product contracted 1.6% from the third quarter and 1.5% from a year earlier in the final three months of 2008 in the 15 countries that then used the euro, the biggest contraction by both measures since records began in 1995, the European Union’s Eurostat statistics agency said.

“Worryingly, it is far from inconceivable that euro-zone GDP contraction was even deeper in the first quarter of 2008, given largely dire data and survey evidence,” said Howard Archer, chief U.K. and European economist at IHS Global Insight.

The issues across Europe are staggering.  After all, the bubble in the UK and in much of Europe was actually far larger than anything the U.S. experienced.  It’s safe to assume then, that their downturn is likely to be worse.

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In addition, European banks loaned over $3.5 trillion to emerging markets (think junk debt) while American banks made most of their junk loans domestically.  The U.S. and Japan combined made only $700 billion in loans to emerging market nations.  Europe was financing the bubbles in the BRIC nations and as those bubbles implode its the European banks that are on the hook.

Europe is lagging the U.S.  into this recession as well.  The global economy remained strong throughout 2007 as it was clear that the U.S. was slipping into a coma.  The decoupling debates waged wildly, but the world succumbed in 2008.  The bad news for the U.S. is that a sizable amount of S&P 500 earnings come from Europe and abroad.  If you recall, global earnings were so strong that the S&P 500 posted over $80 in earnings in 2007 despite 2% growth domestically.   Unfortunately for the U.S. we are going to get the same lagging earnings from Europe in the coming two years.  Strong on the way in, but weak on the way out.  That’s what we can expect from the Euro lag.  Even if we recover it’s unlikely that European economies will come out of the recession at the same time which is certain to hinder earnings and keep a lid on stock prices going forward.