Europe Finds Slope Ahead Is Growing Ever Steeper

Greece, Ireland, Portugal and Spain are already in downturns or fighting to escape them, as high unemployment and austerity measures bite. But in the past few weeks, Germany and France, the Continent’s powerhouses, have also started to falter, hurt as struggling banks tighten their lending and orders for business from the indebted countries of Europe ebb.

“The sovereign debt crisis is like a fungus on the economy,” said Jörg Krämer, the chief economist at Commerzbank, who last week joined the growing crowd of analysts who are now predicting that Europe is headed for a recession. “I thought it would be just a slowdown, as is not unusual after a recovery. But I have changed my mind.”

The euro zone economy has already slowed to essentially no growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenues are likely to fall and unemployment is expected to rise, making it even more difficult for Europe to deal with the sovereign debt crisis and protect its shaky banks.

Worse, emerging markets that are important customers for European exports, like China and Brazil, are tightening credit to prevent their economies from overheating. The United States, another main market, is stuck in its own economic rut.

In a sign of how quickly the ground is shifting, the European Central Bank on Thursday could well lower interest rates — just a few months after it started raising them in what is now seen by many as a misguided effort to stem incipient inflation.

Distress is increasingly evident across Europe. Philippe Leydier had been feeling more upbeat about his business until this summer, when orders for his French 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 business in Lyon, Emin Leydier, 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, or $60 billion, austerity program has many worried about a recession. Paolo Bastianello, the managing director of Marly’s, a clothing retailer, has also seen his hopes fade.

At the start of the year, Mr. Bastianello was more optimistic that Europe might escape its troubles and that Italy’s dysfunctional government would seriously tackle the country’s problems. “But the turbulence of the markets and the uncertainty about this abnormal mass of public debt just scare people away from buying,” he said.

Not everyone is so pessimistic, especially in Germany. But even there, indicators are pointing to slower growth.

German executives say sales remain healthy, at least so far. “We don’t see any impact on our business,” said Roland Busch, a member of the management board of Siemens, the electronics and engineering giant based in Munich.

“The economy is cooling down but not more than that,” said Mr. Busch, who oversees a unit that supplies traffic-control systems, street cars and other products for public works.

Expecting demand for urban infrastructure improvements to grow, Siemens plans to add about 150 people over the next two years to the 850 employees at its complex in Sacramento, California, that makes light-rail cars.

Bucking the trend almost everywhere else in the developed world, unemployment in Germany continues to fall, and there are shortages of skilled workers in several key sectors.

“We know Germany is an exception,” said Jörg Köther, a spokesman for the IG Metall union.

Article source: http://www.nytimes.com/2011/10/05/business/global/europe-finds-slope-ahead-is-growing-ever-steeper.html?partner=rss&emc=rss