Southern Europe’s Recession Threatens to Spread North

German exporters like Daimler have been bastions of stability on a continent burdened with shaky banks, dysfunctional governments and legions of unemployed youth — not to mention the worst auto industry slump in two decades. But Daimler’s glum forecast for 2013 was the latest evidence that Germany, and other relatively healthy countries like Austria and Finland, risk falling into the recession that has long afflicted their southern neighbors.

The slowdown in Germany was foreshadowed by months of declining industrial output, said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. “The E.U. has made Europe a much more cohesive economy, which is good when things are going up,” he said. “But when things are going down the multiplier is very strong. An outgoing tide lowers all ships.”

The region’s overall economic weakness as well as slowing demand in China and other big markets for German exports of consumer products, cars and sophisticated machine tools, industrial robots and construction equipment are finally taking their toll.

Just one more consecutive quarter of shrinking economic output and Germany would officially enter a recession. The same is true of Belgium, France, Luxembourg, Austria, even Sweden and Finland. The Netherlands has already suffered two quarters of declining gross domestic product.

Further evidence of the spreading European recession came Thursday, first from Madrid, where the Spanish government reported that unemployment had reached a record level: 27.2 percent. Then new economic data from London indicated that Britain had barely avoided slipping back into recession for the third time since 2008.

“The reality is that Europe still faces severe vulnerabilities that — if unaddressed — could degenerate into a stagnation scenario,” David Lipton, first deputy managing director of the International Monetary Fund, said in London on Thursday.

If Germany slips into recession, much would slide down with it. Germany and the other 26 countries of the European Union together represent the world’s second-largest economy and as a bloc it is the single largest United States trading partner. The further delay in Europe’s recovery that a German recession would cause would seriously hamper growth in the United States, Asia and Latin America.

What growth remains in the region is coming mostly from countries in Eastern Europe. Poland is protected by its large domestic market and a healthy banking system. After a severe downturn that began in 2008, growth is rebounding in the Baltic nations of Estonia, Lithuania and Latvia. In that recession, wages fell, real estate prices dropped and banks worked through the painful process of improving their financial condition.

Unemployment there is by no means low, but those countries benefit by being the low-wage economies of Europe. They continue to attract investment of capital. It also helps that those economies, because they do not use the euro as their currency, can adjust their currency more easily to changing economic conditions in the rest of the world. Their economic planners have more policy tools than simply adjusting interest rates.

In Germany, there is little overt sign of crisis. Unemployment is 5.4 percent compared with an average of 10.9 percent in Europe. Nevertheless, polls show businesses are growing pessimistic. “The German market cannot decouple from this environment,” Bodo K. Uebber, the Daimler chief financial officer, told analysts Wednesday.

The problem for the rest of Europe is that any hope for recovery is pinned on a robust German economy. Companies in Spain and Italy have depended on German demand to compensate for a collapse in consumer spending in their own countries.

Article source: http://www.nytimes.com/2013/04/26/business/southern-europes-recession-threatens-to-spread-north.html?partner=rss&emc=rss