Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as high unemployment and austerity belt-tightening take their toll. But in the last few weeks, even prosperous Germany and France, the Continent’s powerhouses, have started to be dragged down, hurt by the ebbing of business orders from indebted countries in the rest of Europe.
European stocks continued their latest plunge on Tuesday, as the German financial giant Deutsche Bank, buffeted by the debt crisis, reduced its profit forecast for the year. Investors were also jolted by news that the French-Belgian investment bank Dexia might be the region’s first large bank to need a government rescue as a result of the current debt crisis.
It is not just the Continent’s problem.
The United States, a major banking and trading partner with Europe, is stuck in its own rut — prompting the Federal Reserve chairman, Ben S. Bernanke, to warn Tuesday that “the recovery is close to faltering.” He told a Congressional panel that the economy could fall into a new recession unless the government took further action.
United States stocks ended up for the day, but had bounced wildly on jitters about Europe and rising fears that Greece would have to default on its sovereign — or government — debt. The Greek finance minister said Tuesday that the country could continue to pay its bills at least through mid-November, after other European finance ministers said Greece would not receive its next installment of bailout money before next month, if then.
A downturn in Europe, if it happens, could help tip America back into recession and would undoubtedly ricochet around the world. Europe’s banks are among the most interconnected in the world, and the euro is the world’s second-largest reserve currency after the dollar.
The 17 European Union nations that share the euro together account for about one-fifth of global output. And emerging markets that are important customers for European exports, like China and Brazil, are beginning to retrench.
“We are the epicenter of this global crisis,” Jean-Claude Trichet, the president of the European Central Bank, said on Tuesday at the European Parliament.
A growing chorus of analysts now predict that Europe is heading for an outright recession. “The sovereign debt crisis is like a fungus on the economy,” said Jörg Krämer, the chief economist at Commerzbank. “I thought it would be just a slowdown,” he said. “But I have changed my mind.”
Goldman Sachs predicted Tuesday that both Germany and France would slip into recession, although other forecasts are less grim.
Already, the euro zone economy has slowed to essentially zero growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenue is likely to fall and unemployment, already high, is expected to rise, making it even more difficult for Europe to address the sovereign debt crisis and protect its shaky banks.
In a sign of how quickly the ground is shifting, the European Central Bank might lower interest rates on Thursday — just a few months after it started raising them in what is now seen as a misguided effort to stem incipient inflation.
Distress is increasingly evident across Europe.
Philippe Leydier, a French businessman, had been feeling more upbeat until this summer, when orders for his company’s corrugated boxes suddenly began to slide. Orders fell further last month, as auto parts makers, electrical engineering firms, farmers and other industries reduced production.
“The euro crisis and the financial crisis linked to the debt of European countries is serious,” said Mr. Leydier, whose box and paper manufacturing firm, Emin Leydier, in Lyon, often provides an early signal of seismic shifts in economic activity. “European governments need to find a solution — and fast.”
In Italy, which has the euro zone’s third-largest economy, after those of Germany and France, a 45 billion euro austerity program aimed at reducing debt has many worried about a recession. On Tuesday, the ratings agency Moody’s downgraded Italian government bonds by three notches, to A2 from Aa2, and kept a negative outlook on the rating.
Paolo Bastianello, the managing director of Marly’s, an Italian clothing retailer, is increasingly discouraged.
Liz Alderman reported from Paris and Jack Ewing from Frankfurt. Raphael Minder contributed reporting from Lisbon, Gaia Pianigiani from Rome and Stephen Castle from Luxembourg.
Article source: http://feeds.nytimes.com/click.phdo?i=d72b58ce395b32cadc9abbf72384c9f2
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