NY: Euro Zone Economy Declines, Putting Pressure on Leaders
By JACK EWING
FRANKFURT — The economy in the euro zone officially shifted from stagnation to decline in the second quarter of 2012, portending a recession later in the year that will put even more pressure on beleaguered political leaders struggling to keep the common currency intact.
Gross domestic product from April to June fell 0.2 percent compared to the previous quarter in the 17 countries that make up the euro zone, according to preliminary estimates by Eurostat, the European Union’s statistics agency. In the previous quarter, growth had been zero.
The decline in output, caused partly by government budget-cutting, means that the euro zone is likely to enter recession — defined as two quarters in a row of shrinking output — later this year, economists said. Even the German economy, which has helped compensate for weakness in Italy and Spain, seems to be losing momentum.
“Growth of the German economy was no longer strong enough to keep the total euro zone economy above the zero line,” Christoph Weil, an economist at Commerzbank, said in a note to clients.
The newest economic data adds to the challenges facing euro zone leaders as they trickle back from vacation and again confront the debt crisis. Slower growth almost automatically translates into lower tax receipts, because people lose their jobs and companies earn less profit. That, in turn, puts even more stress on government budgets.
To be sure, Germany grew more than expected from April through June, expanding 0.3 percent. In addition, France avoided a downturn with a third quarter of zero growth. Economists had predicted that France would sink into negative territory.
But that modest good news was outweighed by data suggesting that the German economy will slow later in the year and could even decline. The German Federal Statistical Office said that growth in the quarter was driven by exports and consumer spending, while investment by business fell.
Surveys like the ZEW Indicator of Economic Sentiment, which declined to its lowest level of the year Tuesday, show that German manufacturers are worried about how the euro zone crisis will play out. As a result, they are hesitating to buy new equipment.
Slower growth in the rest of the world has also hurt demand for exports from Germany and other European countries like Finland, where growth sagged 1 percent in the quarter.
Italy and Spain, which have the No.3 and No.4 economies in the euro zone, remained mired in recession. The Italian economy shrank 0.7 percent, while Spain declined 0.4 percent. Neither country has had any economic growth for more than a year.
Some companies continue to confound the crisis. Porsche, the maker of high-performance cars based in Stuttgart, said Tuesday that sales through July rose 14 percent compared to the first seven months of 2011. The company sold about 82,000 cars.
Inevitably, though, Germany is being affected by slack demand from the rest of the euro zone, which remains its biggest source of trade. In the first quarter of 2012, the German economy grew 0.5 percent compared to the fourth quarter of 2011.
The Bundesbank, the country’s central bank, has predicted modest growth during the rest of the year, but some economists disagree. Recent figures have shown a decline in German industrial production and a slump in new factory orders, signaling a further weakening of growth.
“We should not get carried away by a seemingly invulnerability of the German economy,” Carsten Brzeski, senior economist at the Dutch bank ING, said in a note to clients. “A further slowdown of the economy dozes under the surface of today’s strong numbers.”
Shrinking output amplifies the debt crisis in part because it provokes an increase in a country’s ratio of debt to annual G.D.P. — a commonly used indicator of overall government indebtedness. Poor economic performance by Spain and Italy could further shake confidence among investors in their creditworthiness, causing their borrowing costs to rise and threatening to create a vicious spiral.
Spain and Italy and other troubled countries have begun taking steps to improve growth by deregulating their labor markets, removing bureaucratic barriers to entrepreneurship, and other measures. But such changes typically take years to bear fruit, and in the meantime stir political turmoil because of resistance from unions or other interest groups.
Major European stock indexes posted modest gains Tuesday, and the euro also gained against the dollar.
“It shows just how dire things have become in the single currency area when the markets take comfort from figures that show the French and German economies are pretty much flat on their backs,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mail.
Countries in southern Europe continue to suffer the worst economic declines. Portugal’s economy slumped 1.2 percent during the quarter. But some northern countries are feeling the pain, too. The Belgian economy fell 0.6 percent. Austria and the Netherlands both grew.
Greece reported yesterday that its economy shrank 6.2 percent in the second quarter compared to a year earlier. That was actually a slight improvement over the first-quarter decline of 6.5 percent.
Greece, which has been largely cut off from debt markets, sold €4.1 billion, or $5.1 billion, of 13-week Treasury bills Tuesday, the Public Debt Management Agency reported.
The sale amount was larger than the maximum €3.1 billion that had been planned. The yield ticked up to 4.43 percent from 4.28 percent at the previous such auction on July 17.
The auction could not be interpreted as a sign that Greece is somehow creditworthy again. The buyers are primarily Greek banks that will use the debt as collateral to borrow money cheaply from the Greek central bank, under an emergency program authorized by the European Central Bank. The proceeds from the bond sale will allow Greece to repay €3.2 billion in maturing bonds held by the E.C.B.
The circular transaction allows Greece to avoid defaulting on its bonds, which would also create losses at the E.C.B.
