Global News
FRANKFURT—Europe’s fragile economy showed deepening distress as industrial production dropped across the euro zone, dimming hopes the region’s leaders will be to resolve a debt crisis that German Chancellor Angela Merkel on Monday called Europe’s “most difficult hours since World War II.”
Italy was forced to pay its highest interest rate since the euro’s creation to sell five-year bonds—a sign of skepticism that new governments in Italy and Greece will be able to simultaneously boost economic growth and reduce high public-debt levels.
European stocks fell, as did the euro, amid concern that the euro bloc may slump into recession at the end of this year. Third-quarter gross domestic product figures due Tuesday for the euro zone, France and Germany, among others, are expected to show only slight growth.
Industrial production in the euro zone plunged 2% in September from August, the steepest slide since February 2009, according to the European Union’s statistics agency. The decline stretched from the weak periphery of Spain, Italy and Portugal to powerhouses such as Germany, France and the Netherlands. Compared with a year ago, output rose just 2.2%—the weakest gain in nearly two years. The data suggest “the euro-zone will soon fall back into another fairly deep recession,” said Ben May, economist at consultancy Capital Economics.
For the third quarter, factory output likely eked out a slight gain because of strong growth in July and August, economists said, noting that should help euro-zone GDP expand around 1.5% on an annualized basis. Modest growth in France and Germany for the third quarter would offset weakness in other parts of the euro bloc.
Nevertheless, the third quarter could mark the end of an economic recovery that began a little over two years ago and was driven largely by a strong export-led rebound in Germany. Surveys from euro-zone purchasing executives suggest the manufacturing sector contracted further in October, making a decline in fourth-quarter GDP likely.
The latest industrial production report “bodes ill for the fourth quarter,” said Carsten Brzeski, economist at ING Bank, expects euro-zone GDP to contract at a 1.5% annualized rate in the final three months of this year, followed by another slight contraction in early 2012. Economists generally define recession as back-to-back declines in GDP.
The latest economic figures suggest a grim reality for the euro bloc’s most vulnerable members. Without economic growth, Italy, Greece and others will have difficulty cutting government-debt levels even if they raise taxes and cut spending. Rising bond yields make the task even more difficult.
Italy sold €3 billion ($4.13 billion) in five-year government bonds Monday, the first debt sale since former European Commissioner Mario Monti was tapped to form a new government. The new bonds fetched an average yield of 6.29%—a euro-era high and nearly one percentage point higher than the sale one month ago.
Rome is scrambling to reassure investors that it will take the tough medicine needed to slash its government debt load, which at 120% of GDP is second only to Greece’s in the euro zone. It has promised a slew of measures—including a higher retirement age, reduction in civil service positions and labor market reforms—aimed at cutting the deficit and reinvigorating its economy, which has barely grown over the last 10 years.
Greece’s parliament on Monday began a debate on the policy priorities of its new government under Lucas Papademos, a former European Central Bank vice president tapped last week as interim prime minister. The government is charged with implementing Greece’s €130 billion bailout agreement.
Stagnant growth will make these steps more difficult. A weaker economy means fewer corporate and household tax receipts, while rising unemployment puts added pressure on unemployment and other social spending. Higher debt-financing costs will make things worse. “It’s like cleaning up the floor with the faucet wide open, it’s a very hard task,” Mr. Brzeski said.
In Greece, where chronic deficits and fiscal mismanagement led to its crisis, stringent austerity measures are needed no matter how painful, analysts say. But Italy is a different case. Despite its heavy debt burden, Italy’s annual budget deficit is low compared to other European countries. Its main problem is a lack of economic growth.
“There’s a good argument for Italy that rather than getting the cleaver out and slashing spending, it’d be much better to focus on… measures designed to keep them from falling back into recession,” Mr. May said.
Write to Brian Blackstone at [email protected]
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By: Brian Blackstone with contributions from Matt Phillips and Stelios Bouras
Source: The Wall Street Journal, Nov. 15, 2011
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