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Friday, August 13, 2010

EURONOMICS: Gloom Overtaking Euro Zone Again As Growth Peaks

The Wall Street Journal

Gloom is overtaking financial markets' view of the euro zone again--just at the moment when the region prepares to announce what will be the strongest growth figures in two years.

Eurostat is expected to announce Friday that the euro-zone economy grew by around 0.7% in the second quarter, led by a veritable boom in Germany, its largest member state. Germany is expected to have grown 1.4% from the first quarter, according to a poll of analysts by Dow Jones Newswires. That would make it one of the strongest quarters since reunification in 1990.

That development seems at odds with the news from the region in the spring, when fears that one or more of its 16 countries might go bankrupt caused upheavals in government bond markets, and forced governments and the European Central Bank to intervene massively to stave off a whole new crisis.

The trouble is, in the market's mind, the European recovery is already history. Growing signs of an economic slowdown in the U.S. and China have already convinced markets that the euro zone's rebound can't last. The euro has fallen by more than 4.5 cents in a week against the dollar, as concerns about global growth have spread, again raising questions as to how the euro zone--especially its weaker states--will service its debt mountain in the future. At 1320 GMT, the euro was at $1.2817, from a high of nearly $1.3300 last week.

Even ECB President Jean-Claude Trichet last week acknowledged that the second half of the year would be "less buoyant" than the last three months, although he still thought that the momentum generated in the spring will help make the third quarter better than expected. That view is supported by survey data across the region showing reasonably high levels of business confidence.

Analysts say that the slowdown elsewhere in the world will expose the fragility of the euro zone's recovery, which has relied too much on exporting and not enough on keeping the domestic economy going, with growth in many countries not strong enough to create jobs. Chiara Corsa, an economist with UniCredit in Milan, said she expects euro-area joblessness "to drift higher for a while still" and that dramatic steps to reduce budget deficits will also continue to weigh on consumption.

Overall, professional forecasters still expect the euro zone to grow by 1.1% this year, the ECB said Thursday. That implies a slowdown in the second half, but no new recession.

Exports, at least, have been bolstered by a revival in world trade, which had collapsed in early 2009 as the crisis exposed the high degree of interconnection between all parts of the global economy and its financial sector. But even this may not last, because China, exerting an ever-larger influence in the world economy, has cut its stimulus measures, restricted bank lending and announced measures to close 2,000 energy-efficient factories. At the same time, the U.S. economy has weakened enough to convince the Federal Reserve not to rein in its stimulus measures.

"The global inventory cycle contribution was very strong in the first half of this year and there are clearly signs that this can't continue," said UniCredit's Corsa.

The ECB itself fretted Thursday in its August monthly bulletin that neither the private sector nor the banking sector looks strong enough to replace the state as the engine of growth, saying: "The sustainability of the recovery in global and euro-area trade will depend critically not only on a further strengthening of private demand, but also on the robustness and health of the global financial system."

Half of the problem is the huge differences in fortunes between the various member states of the euro zone. The overall picture is helped by the fact that all of the bloc's three largest economies--Germany, France and Italy--are growing.

The problems begin in the smaller, peripheral economies, such as Greece and Portugal, which are forcing through heavy public-spending cuts to bring their budget deficits under control. Data released Thursday showed the Greek economy shrunk 1.5% in the second quarter, and growth in Spain and Portugal is also expected to be close to zero.