Pain spreads to the heart of Europe

Share

Europe's powerhouse economies are faltering, erasing the dividing line between north and south and raising troubling questions about the outlook for the troubled region.

The euro zone remained stuck in recession in the first quarter of the year, according to figures released Wednesday that showed the economy of the 17-country monetary union contracted by 0.2 per cent from the previous quarter.

The contraction marked the sixth in a row for the euro zone.

But for a change, the wealthy countries of the north shared the pain with their poorer neighbours.

France slipped back into recession, and Germany's growth was so anemic that it is in danger of a double-dip slump. The two are Europe's biggest economies, and their enduring health was supposed to keep the euro zone, and the wider 27-member European Union, from a protracted slowdown.

Now, Europe cannot count on France and Germany for relief, at least in the short term, a troubling development given the severe recessions in some of the weaker nations and high unemployment, currently running at 12.1 per cent in the euro zone and as high as about 27 per cent in the crippled economies of Greece and Spain.

"The story here is one of economic convergence in the euro zone," said Guy Foster, strategy analyst in London with investment manager Brewin Dolphin.

Charles Kehoe, co-owner of Tout Terrain, a Paris brand developer and distributor of children's products such as strollers, said his company's sales are up this year but profit margins are sinking along with the economy.

"But most of my colleagues in the industry are complaining of double-digit drops," he said. "Overall consumption is down and only the most dynamic of our retailer clients are surviving. We're seeing a lot of shop closures in our business."

France's national statistics office Insee reported that gross domestic product fell 0.2 per cent in the first quarter, following a 0.2 per cent fall in the previous quarter. A recession is generally defined as two successive quarters of contraction. Economists had predicted a 0.1 per cent contraction.

The recession is putting enormous pressure on socialist President François Hollande, who has been in office for exactly a year, to find ways to make the economy more competitive for fear that the country's jobless rate, now at 10.9 per cent, will surge again.

French Finance Minister Pierre Moscovici said the recession was "largely due to the environment in the euro zone," but reinforced the need for the government to put "all its energy" into growth measures as the country backs away from harsh austerity. France has been given an extra two years to reduce its budget deficit to 3 per cent of GDP or less.

Germany's GDP figures were as disappointing as France's because it was supposed to resume its status as Europe's growth engine. Germany's statistics office estimated the economy expanded by a mere 0.1 per cent in the first quarter, against a sharp decline of 0.7 per cent in the last quarter of 2012 (official figures will be released on May 24).

Growth was unimpressive because the famous German export juggernaut is probably rolling a bit less quickly. China's growth rates are becoming more subdued and the euro zone is shrinking. At the same time, competition is heating up. The devalued yen will make Japan more competitive with German products such as cars and industrial robots. "Recent evidence has shown the [German] economy tipping into the mire with other parts of the union," Mr. Foster said.

The numbers illustrate how the pain is spreading, though not hitting every country to the same extent, amid the debate in Europe over austerity versus stimulus.

The French and Germans are feeling the pinch because of the extent to which they rely on trade in goods and services with their neighbours. That affects everything from banking and telecommunications to technology and consulting services.

"While EU leaders continue to congratulate themselves on the continued fall in sovereign bond yields, citing them as a sign of confidence, of which they are nothing of the sort, they continue to waste time in failing to deal with the real problems of the banking sector and the transmission mechanism in Europe," said senior market analyst Michael Hewson of CMC Markets in London.

Germany is also feeling the effects of slower growth in China, its biggest export market outside of Europe.

Wednesday's fresh data showed wide swaths of gloom in Europe. The Czech Republic revealed that GDP fell by a hefty 0.8 per cent in the first quarter, marking the fifth straight quarter of contraction. The Dutch economy shrank by 0.1 per cent. The economies of both Italy and Spain shrank by 0.5 per cent.

Italy's recession is turning into a marathon of pain. The first quarter's contraction marks seven contractions in a row. Northern Italy is deindustrializing at an alarming pace, with output down by 20 per cent or more since the crisis began in 2008. In March, the seasonally adjusted industrial production index was own 0.8 per cent over February.

"Today's GDP figures once again show that the euro zone remains the weakest link in the world economy," said ING economist Peter Vanden Houte.

Editor's Note: An earlier version of this article, which has been corrected, stated the euro zone economy contracted by 2 per cent from the previous quarter. In fact, the euro zone remained stuck in recession in the first quarter of the year, according to figures released Wednesday that showed the economy contracted by 0.2 per cent from the previous quarter.