Growth in Euro Zone Stalls, Slowing Debt Crisis Solution

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

Gross domestic product in the 17-nation euro area rose 0.2 percent in the second quarter of 2011 compared with the previous quarter, according to Eurostat, the E.U. statistics agency. Euro area growth was down from 0.8 percent in the first quarter.

G.D.P. growth in Germany, which has been the region’s economic locomotive, fell to 0.1 percent compared with the previous quarter, when the economy expanded 1.3 percent, the German Federal Statistical Office said. Analysts had expected growth of 0.5 percent.

“It now looks like growth is slowing in core countries too,” Christoph Weil, an economist at Commerzbank, wrote in a note. “This could intensify the sovereign debt crisis in so far as the readiness and ability of countries with high credit ratings to help crisis-stricken countries will drop as a result. This could trigger a downward spiral in economic growth.”

Instead, what impetus remains in the European economy came from countries like Austria, Belgium and Finland. Even Italy, with growth of 0.3 percent compared with the previous quarter, outperformed Germany in the second quarter.

German and Italian shares led a broad decline in European stocks Tuesday. Germany’s DAX index was down more than 2 percent at midday, as was the FTSE Italia index . The euro fell 0.8 cents to $1.437.

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.

The German figures, which were seasonally adjusted, follow data released Friday that 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 percent, 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.

Analysts at Commerzbank said that a warm spring meant that construction projects in Germany had begun earlier than usual, subtracting some activity from the second quarter. Without that effect, growth for the quarter would have been 0.4 percent, they said.

The slowdown in Germany came despite an increase in the number of people employed. The statistics office said 41 million people were employed in Germany, an increase of 553,000 people, or 1.4 percent, from a year earlier, according to preliminary figures.

The slowdown was foreshadowed by results from companies like Deutsche Bank and Siemens in recent weeks that fell short of analysts’ expectations, 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.

E.On attributed the loss chiefly to the government’s decision to force some of the company’s nuclear power plants to close early, but sales declines in foreign markets like Britain and Hungary also played a role.

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 percent this year, compared with a previous forecast for a 2 percent decline.

However, Eurostat said the Portuguese economy was stagnant in the second quarter, an improvement over a decline of 0.6 percent in the first 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.

Article source: http://www.nytimes.com/2011/08/17/business/global/euro-zone-economy.html?partner=rss&emc=rss