Eurozone growth falls, signalling trouble for Germany

european_flag1.jpg [Reuters]

The eurozone's debt-ravaged economy shrank in the second quarter, having flatlined in the first, despite continued German growth that economists said could soon be snuffed out.

The 17-nation currency bloc contracted by 0.2% on the quarter, according to data released today (14 August). Germany eked out growth of 0.3%, marginally beating forecasts.

Economists said worse is likely to come and even Europe's largest economy is unlikely to defy gravity for long unless decisive action is taken to tackle the bloc's debt crisis.

"Growth turned out to be pretty solid. But this could be the last positive piece of news out of Germany for some time," said Jörg Krämer at Germany's Commerzbank. "The German economy could contract in the summer. It is fundamentally in good structural shape, but can't decouple from the recession in the eurozone, plus the global economy has also shifted down a gear."

Aside from a downward blip in the last three months of 2011, the eurozone has posted pretty consistent – if not meagre – growth over the past three years with some debt-laden members mire in recession for some time.

"It was a touch better than we expected, but I think overall it confirms the idea that the eurozone is in a recession phase," Aline Schuiling, economist at the Dutch bank ABN AMRO, said of today’s data.

"What we see is a vicious circle of budget cuts, high interest rates in the periphery and sovereign debt rising," she said. "Policymakers are moving very slowly. There are limited prospects for growth in the eurozone. We expect another contraction in Q3."

For France, it was the third consecutive quarter of zero growth. The central bank has already said it expects a mild contraction in the third quarter.

"These figures are not excellent, but at the same time France is not in recession while the majority of its European partners are," Finance Minister Pierre Moscovici told Europe 1 radio.

Austria and the Netherlands almost matched Germany's performance, each posting growth of 0.2%. Economists surveyed by Reuters had expected the Dutch economy to shrink 0.3%.

Finland, one of Germany's northern European allies in pushing for austerity, suffered a 0.7% year-on-year fall in GDP.

Double blow to troubled economies

For the currency bloc's members at the sharp end of its debt crisis, the picture is bleaker still and as economies shrink, so do tax revenues, making deficit-cutting even harder to achieve.

That has fostered a growing debate inside and outside Europe about the sense of austerity drives.

Bailed-out Portugal's recession deepened with GDP diving by 1.2% on the quarter and Cyprus contracted by 0.8%.

Figures released on Monday showed deficit-cutting measures helped to shrink Greece's economy 6.2% year-on-year in the second quarter. Economists say the slump will persist as the government scrambles to secure billions in additional cuts to keep bailout funds flowing.

Italy's second quarter data last week showed the economy contracted 0.7% quarter-on-quarter, compounding the difficulties for Mario Monti's technocrat government as it tries to avoid a bailout.

Spain's economy shrank 0.4% over the same period, pushing it deeper into recession, according to figures out two weeks ago.

A big unanswered question is whether a weakening economy will make Germans, the EU's paymasters, less likely to support government rescue efforts for the broader eurozone.

German Chancellor Angela Merkel has said repeatedly over the past year that she will do everything to save the euro, most recently after the European Central Bank signalled it would intervene in the bond market to lower Spanish and Italian borrowing costs.

Not all Germans support that course and the chancellor's room for manoeuvre appears to be shrinking at a time when both Greece and Spain may soon require new rescues. However, if ordinary Germans start to feel real economic pain, their response could be to demand their leaders sort out the crisis that is now finally knocking at their door.

European Union

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