Eurozone economy shrinks 0.2% in spring

Europe is edging closer to recession, dragged down by the crippling debt problems of the 17-country euro bloc, official figures showed Tuesday.
Workers build Ford Fiestas at a factory in Cologne in February. The eurozone would would have slipped into recession in the spring had it not been for better-than-expected GDP growth in Germany and France. (Frank Augstein/Associated Press)

Europe is edging closer to recession, dragged down by the crippling debt problems of the 17 countries that use the euro, official figures showed Tuesday.

Eurostat, Europe's statistics agency, revealed that the economies of both the eurozone and the European Union, which has 27 countries, shrank by a quarterly rate of 0.2 per cent in the second quarter of the year. In the first quarter, output for both regions was flat.

Europe's debt woes have been blamed for the sharp deterioration in the global economic outlook over the last few months.

The 17-country eurozone is grappling with sky-high debt levels and record unemployment of 11.2 per cent. Compared with the second quarter of last year, the eurozone's economy is 0.4 per cent smaller.

The region's economy would have slipped into recession had it not been for better-than-expected GDP figures from its two leading economies, Germany and France.

Germany, Europe's biggest economy, posted quarterly growth of 0.3 per cent, better than the 0.2 per cent uptick forecast. France also beat expectations of a small contraction in its output to record no change in its economy for the second quarter.

The European Union, which has a population of 500 million people, recorded a GDP last year of $15.5 trillion — slightly more than the U.S.'s output. It is also a major source of sales for the world's leading companies.

Business confidence suffers

Forty per cent of McDonald's global revenue comes from Europe — more than it generates in the U.S.. General Motors, meanwhile, sold 1.7 million vehicles in Europe last year, a fifth of its worldwide sales.

The region's stumbling economy is making it harder for other economies to grow. Policymakers around the world are urging more decisive action — particularly from the European Central Bank — to deal with the crippling debt crisis to restore confidence to the global economy.

"The ECB's recent announcement that it will do 'whatever it takes' to save the euro is welcome, but clarity over what will be done is crucial," said Tom Rogers, a senior economic adviser for accounting firm Ernst & Young.

Markets have grown more optimistic recently that Europe's firefighting efforts will pick up the pace. London's FTSE 100 index closed up 0.45 per cent, Frankfurt's DAX climbed 0.86 per cent and the Paris CAC 40 was ahead 0.70 per cent. The euro slipped 0.02 per cent to $1.2331 US by mid-afternoon.

Germany currently benefits from strong demand for its products, but its high-value exporters are finding it increasingly difficult to tap international markets. Forward-looking surveys, including Tuesday's closely monitored ZEW survey of German investor sentiment, are suggesting that confidence is taking a knock as Europe moves from one crisis point to another.

The other 16 countries that use the euro are Germany's biggest export market and six of them — Greece, Spain, Italy, Cyprus, Malta and Portugal — are in recession. The U.S. recently recorded GDP growth of 0.4 per cent in the second quarter, according to Eurostat, which was less than the growth in the first quarter.

Slower economic growth is also making it harder for governments and central banks to control the debt crisis in Europe. Shrinking economies mean less tax revenue while forcing up the cost of social benefits.

The port of Lisbon lies idle, closed by a dock workers' strike against austerity measures Tuesday. Portugal suffered a big 1.2 per cent drop in output in the spring. (Francisco Seco/Associated Press)

"The big picture is that the economic growth required to bring the region's debt crisis to an end is still nowhere in sight," said Jonathan Loynes, chief European economist at Capital Economics.

For those countries at the front-line of Europe's debt crisis, the figures make for grim reading. Unsurprisingly, Greece is faring the worst — its economy is 6.2 per cent smaller than a year ago and back at the level it was in 2005.

Portugal suffered a big 1.2 per cent drop in output in the second quarter, compared with the previous quarter's modest 0.1 per cent drop.

Both Greece and Portugal have received financial bailouts from the other eurozone countries and the International Monetary Fund and were required to adopt tough austerity measures in return.

Italy and Spain, the eurozone's third- and fourth-largest economies, shrank by 0.7 per cent and 0.4 per cent respectively in the second quarter. Both countries are struggling to convince markets they have a strategy to get a grip on their debts. Spain has even agreed to a bailout of its banks.

Alexander Schumann, chief economist at The Association of German Chambers of Industry and Commerce, urged Europe's indebted countries to carry on with their reforms and said it won't be long before they start reaping the rewards.

"We need to be patient but there are positive signs that in 18 or 24 months we might see light at the end of the tunnel in Portugal, Spain, Italy and Greece, "he said. "We can get there if politicians don't block the tunnel with ideas that add new uncertainty."