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Eurozone Has One Foot In Recession With Economy Contracting Last Quarter

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LONDON -- The 17-nation eurozone has one foot in recession, according to official figures showing the economy contracted 0.3 percent in the final three months of 2011 from the previous quarter, a clear sign that Europe's debt crisis has spared no country in the single currency bloc.

The decline was the first since the second quarter of 2009 and followed a meager 0.1 percent increase in the previous three-month period, Eurostat, the EU's statistics agency, said Wednesday.

The figure was slightly better than expected but shows Europe's economy was hit hard when the debt crisis intensified and threatened to spread to big economies, notably Italy. In November, it appeared likely that the eurozone's third-largest economy would need financial rescue like Greece, Ireland and Portugal.

In a desperate bid to save the euro, Europe's governments agreed to tie their economies more closely together and the European Central Bank offered super-cheap long-term loans to struggling banks. The twin response has helped calm market jitters this year, despite the ongoing confusion over Greece's second bailout.

Whether that was enough to avoid a recession – technically defined as two consecutive quarters of economic contraction – remains to be seen.

"It remains conceivable that the euro area might still escape from re-entering technical recession," said James Ashley, senior European economist at RBC Capital Markets.

Recent indicators suggest that after contracting in the fourth quarter, the eurozone economy has recovered its poise.

Nevertheless, many individual countries in the eurozone are back in recession – Italy, the Netherlands and Belgium, on top of bailed-out Greece and Portugal.

Europe's deteriorating fortunes stand in stark contrast to the performance of the United States, which has seen economic growth slowly recover over the past year and unemployment begin to fall. In the fourth quarter, the U.S. economy grew by 0.7 percent compared with the third quarter, according to Eurostat.

How the global economy fares this year is likely to depend on how Europe deals with the debt crisis. Many institutes, including the International Monetary Fund, think it's the biggest risk to the global economic outlook.

"With Greece still on the edge of disaster and the fiscal crisis deepening, the eurozone economy faces enormous challenges," said Jennifer McKeown, senior European economist at Capital Economics, who is predicting that the eurozone will contract by 1 percent this year and by an even-worse 2.5 percent next.

The quarterly figures from Eurostat were a little better than most analyst predictions of a 0.4 percent drop, but failed to affect markets, which were focused on the possibility that Greece might finally clinch a new bailout deal.

National figures released before the Eurostat data indicated that buoyant investment levels helped France post an unexpected 0.2 percent gain and Germany a lower-than-anticipated 0.2 percent drop.

For 2011 as a whole, the eurozone economy grew by 1.5 percent, while the 27-nation European Union, which includes non-euro countries such as Britain and Sweden, expanded by 1.6 percent.

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