Euro zone slinks toward recession

The European economy shrank over the past three months as slowing German growth and moribund conditions in France pushed the struggling region to the doorstep of recession.

The 0.2 percent slide from April through June included the 17-nation euro area, a currency union beset by twin government debt and banking crises, and the larger 27-nation European Union, a region at the core of the industrialized world and a key market for U.S. products and services.

The United States has skirted the worst of Europe’s troubles. While growth in the United States has slowed, exports to Europe are running ahead of last year and an unexpected jump in July retail sales gave some hope that U.S. households may strengthen their contribution to the country’s tepid expansion. New data on inflation to be released Wednesday could also help determine whether the U.S. Federal Reserve takes more steps to bolster growth.

But the latest data from Europe appeared to confirm that the region — and particularly the euro zone — is entering a long-feared double-dip recession, a new downturn that is taking shape before the wounds from the 2008 crisis have fully healed. That will make it harder for nations to contain already-high levels of public debt and for banks to cope with increasing amounts of bad loans, and possibly more difficult for a stalwart nation such as Germany to back the region’s various bailout and crisis funds without affecting its own standing in world markets.

Critical decisions on the region’s crisis-fighting strategy are expected in coming weeks from Germany’s Constitutional Court and from the European Central Bank, which recently hinted it was ready to do more to prevent large nations such as Spain and Italy from requiring full-fledged bailouts.

Judging from the state of the region’s economy, that may be the only way to avoid even worse problems in the months ahead.

“The big picture is that the economic growth required to bring the region’s debt crisis to an end is still nowhere in sight,” Jonathan Loynes, chief European economist for the Capital Economics consulting firm, wrote in an analysis of the latest European data.

In Madrid, Prime Minister Mariano Rajoy said he was waiting to hear details on the ECB’s plans before deciding whether his country will ask for more help from Europe’s crisis-fighting fund. Spain has already requested European help to bolster its banking system but may need a more comprehensive bailout if the interest rate the government pays to raise money on international markets remains elevated.

European officials have worked hard for a year to prevent Spain and Italy from needing outside help and have often argued that the mere creation of various bailout funds, or “firewalls,” would reassure international investors and thus make their use unnecessary. But that argument has appeared less and less credible over time. Even the ECB has said it will help Spain only if it first taps available European funds and promises to abide by the conditions accompanying a bailout program.

“As long as we don’t know what decision the ECB is going to make, we won’t be making one, either,” Rajoy said, according to wire service reports from the Spanish capital.

A large swath of the euro zone, including Spain, is already in recession, generally defined as two consecutive quarters of economic contraction. The region has been flirting with it since last year, registering a slight contraction at the end of last year before recording a zero percent growth rate between January and March.

But sharp downturns in Spain, Italy and elsewhere pushed the currency area into negative territory from April through June, and there was little expectation that the trend will change soon. European industrial production continued a year-long decline, Eurostat reported, while a measure of German business confidence plunged in an indication that investors in the region’s economic power expect conditions to worsen.

In the broader European Union, recent poor results from the United Kingdom have helped pull down the regional results. Britain’s economy shrank by a faster-than-expected 0.7 percent in the second quarter and has been contracting for nine months.

Tuesday’s data might have been worse. Some analysts expected the French economy to also shrink, but that country managed a third consecutive quarter of 0 percent growth. Germany’s 0.3 percent quarterly growth rate was also faster than some expected.

Even Greece provided a bit of good news that helped push European and U.S. stock markets higher. The country successfully sold more than $5 billion in short-term treasury bills that will allow it to make bond payments due later this month. Although the sale largely amounted to a shuffle of cash and debt among Greek banks, the Greek Central Bank and the ECB, it gives the country time to negotiate spending cuts and other concessions needed to secure its next round of international loan payments in coming weeks.

But it also reaffirmed the sense that the euro region continues separating into a relatively healthy core and a set of “peripheral” nations that may ultimately come to include France, the region’s second-largest economy.

Exports, for example, continued to keep German growth in positive territory, as did stronger household spending that was buoyed by recent wage hikes in the country, according to an analysis by the IHS Global Insight consulting firm. In France, however, trade and declining household spending both undercut growth.

“The country breakdown tells a tale of two regions,” ING Bank economist Martin van Vliet wrote. “Northern Eurozone economies are still defying technical recession, while Southern Europe remains mired.”

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