Euro zone’s slowing growth deepens recession fears amid debt crisis

— New evidence emerged Wednesday that Europe might already have slipped back into recession, further unnerving world leaders who are scrambling to corral the debt crisis roiling the continent’s financial system.

Data show that European manufacturing, including in the regional powerhouse of Germany, is still contracting — the latest signal that the euro-region economy is faltering, said Philippe Waechter, chief of economic research at Natixis Asset Management.

“We are in recession in Europe. . . . We see people changing their minds about the whole economy,” he said. “We see company surveys, consumer confidence surveys. People will not buy a car. They will not invest.”

The slowdown has hit Europe’s core in full force, with growth in France this year now expected to be perhaps 1 percent or less. In Germany, seasonally adjusted unemployment figures edged up Wednesday for the first time in 18 months. The jobless rate for the euro zone’s largest economy ticked up from 6.9 percent to 7 percent, according to the federal labor agency.

The region’s bad economic news gives policymakers even less room to deal with problems such as Greece’s debt crisis and little hope that countries such as Portugal or Spain might grow their way back to economic health. World leaders huddling here for the summit of the Group of 20 economic powers were already rattled by Greek Prime Minister George Papandreou’s announcement that he would put the European rescue plan for his financially reeling nation up for referendum.

That’s one reason Waechter and others say they will be keeping only one eye on what the G-20 does in Cannes this week. With the other they’ll be watching the new president of the European Central Bank, Mario Draghi, when he holds his inaugural meeting of the bank’s policymaking board Thursday.

Draghi was the head of Italy’s central bank before taking over the ECB post from Jean-Claude Trichet. He faces immediate decisions on whether to lower European interest rates and maintain special programs such as purchasing Italian and Spanish bonds to keep those countries out of trouble.

Despite European efforts to develop alternatives for keeping countries solvent, many analysts think the ECB will have to serve as the euro region’s ultimate backstop for the foreseeable future. They say it will need to ensure that banks have enough cash to keep their doors open and try to hold down the interest rates paid by highly indebted countries.

It is a role Trichet disliked but accepted as necessary in a crisis. Draghi, however, supported that policy, as did part of the bank’s governing board. His Thursday news conference will be studied closely for insight about plans to maintain or expand that role.

In a letter to G-20 leaders, the Institute of International Finance, a trade group of the world’s major financial institutions, said that the euro region’s economy is so fragile that the ECB has no choice but to step up.

“It is essential that all parties come together behind the continued active role in the ECB,” the banking group wrote to French President Nicolas Sarkozy, the G-20 host this year.

Staff writer Michael Birnbaum in Athens contributed to this report.

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