Huffpost Business

European Economy Shrinks For First Time Since Introduction Of The Euro

Posted: Updated:

BRUSSELS, Belgium — The euro-zone economy shrank 0.2 percent in the second quarter, EU statistics showed Thursday, raising recession fears as Germany, France and Italy braked sharply with high fuel and food prices holding back consumer spending.

Worse seems yet to come, with European business and consumer confidence at the lowest level in more than five years in July, inflation hovering at the highest point since 1996 and the jobless rate climbing from an all-time low.

Still, the European Commission sought to downplay concerns Europe is verging on a recession, with spokeswoman Amelia Torres saying it would be "exaggerated to use that word."

No euro country is yet officially in recession by showing two consecutive quarters of negative growth _ although Ireland may be once it publishes a second-quarter figure. The once-booming Celtic tiger economy contracted in the first three months of the year.

Output in the 15 economies that share the euro currency contracted by 0.2 percent in the April to June period from the first quarter, expanding just 1.5 percent from the same period a year ago, the EU statistical agency Eurostat said in a first estimate that it may change on Sept. 3.

Torres said the figure was "not really a surprise" given record-breaking oil prices during the second quarter and a mild winter that boosted construction _ and economic growth _ from January to March, making it harder for the second quarter to show an improvement.

But she said the figure "confirmed that the risks are on the downside for growth."

Germany, the region's largest economy, shrank 0.5 percent in April-June from the previous quarter with France and Italy both down 0.3 percent. German growth dropped for the first time in nearly four years.

The world's biggest exporter had so far weathered the economic storm brewing in Europe even as high inflation hit spending at home and foreign sales were hurt by a slowing world economy and the strong euro.

France's sluggish economy failed to lift with the rest of Europe in the last two years. President Nicolas Sarkozy was elected in May 2007 on a promise to turn the country around and help create new businesses.

Any efforts may be coming too late. Marc Touati, an economist at Paris-based brokerage Global Equities, said "the French economy is not just going through some simple turbulence, but is really heading toward a recession at least as bad as in 1993."

Analysts blamed low investment and sliding exports. France depends more on luxury exports such as champagne that have been worse hit by the strong euro and the U.S. slowdown. Germany is more reliant on exporting to emerging economies Brazil and China.

Separately, Eurostat said that July inflation was still high but better than anticipated, posting a figure of 4 percent _ the same as June _ that it revised downward from a record high of 4.1 percent.

The bank in June hiked interest rates from 4 percent to 4.25 percent to try to cool inflation _ even though this risks slowing growth by increasing the cost of borrowing money in a tight credit market still suffering from the subprime banking crisis. Bank President Jean-Claude Trichet pointed to weak growth after the bank's August meeting, suggesting further increases were less likely.

The broader 27-nation European Union also saw growth fall by 0.1 percent from the previous quarter, up just 1.7 percent from a year ago.

Only one EU country is now officially in recession: the formerly fast-growing Baltic economy of Estonia. The economy shrank 0.9 percent in the second quarter and 0.5 percent in the first.

Denmark also risks recession. Eurostat had no second-quarter figure Thursday but the country posted growth of minus 0.6 percent in the first quarter.


Associated Press writers Greg Keller in Paris and Matt Moore in Berlin contributed to this story.