Euro zone slinks toward recession

August 15, 2012

By , Washington Post

The European economy shrank over the past three months as slowing German growth and moribund conditions in France pushed the struggling region to the doorstep of recession.

The 0.2 percent slide from April through June included the 17-nation euro area, a currency union beset by twin government debt and banking crises, and the larger 27-nation European Union, a region at the core of the industrialized world and a key market for U.S. products and services.

The United States has skirted the worst of Europe’s troubles. While growth in the United States has slowed, exports to Europeare running ahead of last year, and an unexpected jump in July retail sales gave some hope that U.S. households may strengthen their contribution to the country’s tepid expansion. New data on inflation to be released Wednesday could also help determine whether the U.S. Federal Reserve takes more steps to bolster growth.

But the latest data from Europe appeared to confirm that the region — and particularly the euro zone — is entering the long-feared double-dip recession, a new downturn that is taking shape before the wounds from the 2008 crisis have fully healed. That will make it harder for nations to contain already-high levels of public debt and for banks to cope with increasing amounts of bad loans, and possibly more difficult for a stalwart nation such as Germany to back the region’s various bailout and crisis funds without affecting its own standing in world markets.

Critical decisions on the region’s crisis-fighting strategy are expected in coming weeks from Germany’s Constitutional Court and from the European Central Bank, which recently hinted it was ready to do more to prevent large nations such as Spain and Italy from requiring full-fledged bailouts.

Judging from the state of the region’s economy, that may be the only way to avoid even worse problems in the months ahead.

“The big picture is that the economic growth required to bring the region’s debt crisis to an end is still nowhere in sight,” Jonathan Loynes, chief European economist for the Capital Economics consulting firm, wrote in an analysis of the latest European data.

In Madrid, Prime Minister Mariano Rajoy said he was waiting to hear details on the ECB’s plans before deciding whether his country will ask for more help from Europe’s crisis-fighting fund. Spain has already requested European help to bolster its banking system but may need a more comprehensive bailout if the interest rate the government pays to raise money on international markets remains elevated.

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