Debt crisis seen taking toll on Euro-Zone economy

All of Europe’s main stock indexes lost ground after the data confirmed fears that government austerity programmes are taking their toll on the European economy, undercutting efforts to contain the sovereign debt crisis.

Gross domestic product (GDP) in the 17-nation euro area rose 0.2 per cent in the second quarter of 2011 compared with the previous quarter, according to Eurostat, the EU statistics agency. Euro area growth was down from 0.8 per cent in the first quarter. GDP growth in Germany, which has been the region’s economic locomotive, fell to 0.1 per cent compared with the previous quarter, when the economy expanded 1.3 per cent, the German Federal Statistical Office said. “It now looks like growth is slowing in core countries too,” Christoph Weil, an economist at Commerzbank, wrote in a note.

Instead, what impetus remains in the European economy came from countries like Austria, Belgium and Finland. Even Italy, with growth of 0.3 per cent compared with the previous quarter, outperformed Germany in the second quarter.  The German economic rebound since the recession of 2009, driven by exports of cars, machinery and other goods to China and other emerging markets, has helped counterbalance weak economies in southern Europe. If Germany slows, the challenges posed by the European sovereign debt crisis will become that much more daunting.

Data showed that the French economy, Europe’s second-largest after Germany’s, did not grow at all in the second quarter. Slower growth means that tax receipts will also grow slowly, which will make it harder for Germany and France to support countries like Italy and Spain that are finding it increasingly difficult to borrow money at interest rates they can afford.

However, slower growth might lead to lower inflation, which will give the European Central Bank more leeway to keep interest rates low and intervene in bond markets. Since last week, the bank has been buying Italian and Spanish debt on the open market to hold down yields, which had risen above 6 per cent, a rate that would have eventually proved ruinous for the two countries. The slowdown in Germany was caused by slower household consumption and construction investment, the German statistics office said. In addition, imports rose faster than exports and led to a buildup of inventories.

The slowdown in Germany came despite an increase in the number of people employed. The slowdown was foreshadowed by results from companies like Deutsche Bank and Siemens in recent weeks and it reinforced the feeling that the extraordinarily fast pace of German economic growth was flattening. E.On, the largest German utility, said last week that it might need to cut as many as 11,000 jobs after experiencing its first loss in a decade.

Greece is already in recession, while growth in Spain is slowing down more than expected this year. The Portuguese government expects the economy to contract 2.3 per cent this year, compared with a previous forecast for a 2 per cent decline. However, Eurostat said the Portuguese economy was stagnant in the second quarter. The euro area trade surplus also improved slightly in June, to €900 million from €200 million in May, Eurostat said. Germany’s surplus of €9 billion remained by far the largest of any European country.