EU economy growing at 1.2% before Ukraine crisis

The 18-country eurozone pushed its economy into higher gear at the start of 2014, before the crisis in Ukraine escalated.

Figures released Wednesday show the eurozone grew by 0.3 per cent in quarter or an annualized rate of around 1.2 per cent. Growth was helped by rising exports and improving investment.

A confrontation between Russia and Europe and the U.S. over military action could lead to a broad range of sanctions and retaliation that could have a profound effect, particularly on Europe, but on the global economy in general- American economist Robert Kahn

Retail sales in the eurozone rose by a monthly rate of 1.6 per cent in January, offsetting the previous month's 1.3 per cent decline.

And in more good news, the Markit purchasing managers index shows business confidence at its highest level since 2011.

There was strong growth in Germany, Europe's largest economy and Spain had its best quarter in seven years, while Italy is growing at a near three-year high. Greece and France remain laggards, with activity among French firms set to decline.

• Eurozone GDP growth picks up pace to 0.3%
• EU pledges $15B to back Ukraine as U.S., Russia hold Paris talks

The improved economic picture is made hazy by events in Ukraine, where the EU agreed to support the pro-Western government with$15 billion US in financial aid in the next couple of years.

"A confrontation between Russia and Europe and the U.S. over military action could lead to a broad range of sanctions and retaliation that could have a profound effect, particularly on Europe, but on the global economy in general," said Robert Kahn, a global fellow with the Council on Foreign Relations in Washington, D.D.

"I am hopeful political discussions that have taken place over the last day and a half or so will be successful in reducing the risk of that crisis," Kahn said in an interview with CBC's The Lang & O'Leary Exchange.

Mixed signs out of Europe

Kahn is worried about the mixed signs out of Europe, sayinggrowth still is sub-par and not nearly strong enough to reduce sky-high unemployment.

Amid high unemployment and ongoing austerity, people in countries such as Spain, Italy and Greece see no bright light at the end of the tunnel, he said.

"European political leaders have to persuade their publics that this is a course that is going to work out, that provides for the future and is worth staying the course on, because if they dont do that the publics of Europe, the voting public, are going to give up," Kahn said.

One bright light forEurope's banks is that they have pulled out of Ukraine since the 2008 financial crisis. But Kahn is still worried about the banking sector.

"Im still concerned about the banking system. The ECB is going to have to walk a very narrow path in this asset quality review and stress test that theyre engaged in right now Im actually concerned that that review will show us that there are a lot more losses in the European banking system than you think," Kahn said.

Wilbur Ross looking at EU banks

Meanwhile U.S. billionaire Wilbur Ross is investing in European banks, using shell company NBNK, which he bought last December.

Known for his ability to choose undervalued assets and fix them, Ross recently sold part of his stake in Bank of Ireland, which he bought during the financial crisis.

He sees potential in banks in Spain and other areas of the EU, with a little restructuring.

The banks generally need restructuring in that what got them into trouble was very lax credit standards. The governments have cleaned them up quite a bit, but theres some residual bad loans left over, so there is a need for restructuring in that regard, he told CBCs The Lang & OLeary Exchange.

Second there is a need to restructure the banks to account for the fact that they now have divested some assets so theyre smaller than they were before and they have to right-size their headcount and the employee benefits and all the labour costs to deal with that, Ross said.