Growth slowed nearly to a stop this summer, and a recession afflicting small countries like Greece and Portugal threatens to spread to some of Europe’s stronger economies as financial market uncertainty erodes confidence among businesses and consumers.
The slowdown will lower living standards and increase concerns that larger European countries like Italy and Spain will go bankrupt, possibly breaking up the 17-nation club that uses the common euro currency.
It’s also bad news for Europe’s big trading partners: the US and Asia.
Until earlier this year, it seemed the euro zone might pull through the debt crisis without too much damage to its economies. While bailed-out countries like Portugal and Greece were in recession, most others were still enjoying solid growth. The troubles were contained.
Paltry growth
BUT as the market chaos intensified, so did its economic impact. Statistics released Tuesday showed euro-zone economic growth at a paltry 0.2 percent in the third quarter, and other surveys are all pointing in one direction—down.
“The economic slump will accelerate in the coming months,” said Christope Weil, an economist at Commerzbank. “The uncertainty caused by the sovereign-debt crisis is lying like mildew upon the euro-zone economy.”
While they share the same currency, the euro-zone economies are not all performing the same. Germany and France continue to grow, but more slowly—at 0.5 percent and 0.4 percent. The Netherlands, traditionally a competitive economy, unexpectedly saw its economy contract in the third quarter. Data for Italy was not ready yet, but is expected to show its economy stagnating.
Even though Germany and France, Europe’s twin engines of growth, are still growing, they are unlikely to defy the drag of the debt crisis much longer.
Extended bouts of financial volatility, of the kind that has hounded Europe for three years, make financial planning more difficult for businesses and households. Consumers will spend less if concerned about losing their jobs and companies will cut down on investment.
Getting credit also becomes more difficult, as banks worry about big losses on government bonds and reduce the amount of money they lend. That stifles new business ventures and makes mortgages harder to come by.
Spending cuts
AMID all this, governments are cutting public sector payrolls and slashing spending to lower their debt loads.
The end result is a self-reinforcing downward spiral of fear that is pushing Europe’s overall economy into recession. “People are uncertain,” said Ferdinand Fichtner of the German Economic Institute DIW. “That is poison for growth.” The European Commission warned recently that unemployment in the euro zone—now at 10.2 percent—would remain high for the foreseeable future.
A recession is bad news in itself, but is particularly worrying in Europe now because it complicates the continent’s efforts to cut its debt, the very thing that triggered all the turmoil.
Governments need their economies to grow if they are to pay down their debts—austerity measures tend to weaken growth in the short-term.
(AP)
