Euro Economy Shrinks for the First Time in Nearly 3 Years

  Google+  Twitter | + More Articles
  • Like on Facebook
  • Share on Google+
  • Share on LinkedIn

Europe’s economy contracted less than forecast in the fourth quarter, according to the European Union’s statistics office in Luxembourg.

Despite the general doom and gloom surrounding all things Europe — Greece is largely to blame for that, but countries like Italy, Spain, and Portugal have played their parts — gross domestic product in the 17-nation euro zone fell just 0.3 percent in the last quarter.

Hot Feature: Iran Halts Oil Exports to Six EU States

Though the contraction was the first since the second quarter of 2009, it undoubtedly less grim than had been forecast, thanks to better-than-expected performances in Germany and France that helped mitigate the diminution of the region’s economy. Germany’s gross domestic product still declined — a blow for the euro zone’s prideful powerhouse — but less than economists had projected, while France’s economy unexpectedly expanded in the fourth quarter.

Germany can take solace in knowing that at least Moody’s still has faith in it, which means a lot considering France and the United Kingdom are officially on watch for a downgrade after the firm cut the credit ratings of six of the region’s member states on Monday, despite signs that the region’s collective economy is stabilizing.

Recent surveys suggest that the fourth-quarter contraction may not be indicative of a trend — euro-zone services output expanded in January after shrinking in the previous four months, economic confidence increased the first time in almost a year, investor confidence in Germany rose to a 10-month high in February, and business sentiment rose in January.

European Central Bank President Mario Draghi has himself pointed to signs of stabilizing in the euro-area economy, and said the ECB averted a credit crunch with its three-year loans to lenders in December. The ECB will offer a second round of low-interest financing at the end of this month.

German GDP fell 0.2 percent in from the third quarter, when it rose 0.6 percent, in what Carsten Brzeski, a senior economist at ING Group in Brussels, referred to as a “growth pause” that is in no way indicative of an approaching recession. France’s economy grew 0.2 percent in the same period.

But the sovereign debt woes of France and Germany’s unfortunate neighbors continued to take a toll on their national economies. Greece’s GDP slumped a whopping 7 percent in the fourth quarter, from a year earlier. The economies of Spain, Belgium, the Netherlands, Italy, and Portugal also contracted in the last three months of 2011.

The debt crisis is cyclical: sovereign debt issues spill into the general economy, hurting businesses, and ultimately shrinking the economy, which ultimately limits the governments’ ability to reduce deficits (with what money?) and assure investors they will be able to meet debt payments.

BNP Paribas is one of those companies. France’s largest bank reported a 51 percent drop in fourth-quarter profit today, hurt by the very writedowns on Greek debt that are supposed to save the region’s economy. MAN SE, a German truckmaker controlled by Volkswagen, said yesterday that sales and operating profit will decline this year as the debt crisis discourages companies from investing.

Many companies are now pinning their survival on the United States, though the country is facing a sort of crisis of its own. Exports from the euro-area rose 0.1 percent in December, despite a 0.9 percent declined in imports, as companies looked to faster-growing markets to bolster sales.

Don’t Miss: Cloud Computing: The Sky is the Limit

To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

More Articles About:
Yahoo Finance, Harvard Business Review, Market Watch, The Wall St. Journal, Financial Times, CNN Money, Fox Business