YEARENDER: European recession looms after a year of debt turmoil

By Andrew McCathie Dec 17, 2011, 2:06 GMT

Berlin - Signs that European leaders have made progress in their efforts to contain the eurozone debt crisis appear to have come too late to save the 17-member currency bloc from recession.

After a year of financial market turmoil, slumping investor confidence and a series of failed attempts by political leaders to come to grips with the crisis, key data and sentiment surveys show the eurozone economy heading into a bleak economic year.

'The eurozone economy is slowly but surely slipping into a new recession,' said ING Bank economist Martin van Vliet.

A slew of official data released in recent weeks have been pointing to a marked slowdown, as the eurozone approaches the end of the year with exports dropping, output contracting, factory order books plunging and retail sales sinking. Meanwhile, unemployment is now at its highest level since the launch of the euro 13 years ago.

Underscoring the downbeat mood, the London-based Markit research group said on Thursday that its key purchasing managers' index (PMI) remained below a reading of 50, which denotes contraction.

'The eurozone suffered its worst quarter for two and a half years in the final three months of 2011, with the PMI data suggesting that the region's economy is likely to have contracted by 0.6 per cent,' said Markit chief economist Chris Williamson.

After bounding into 2010 on a solid footing - powered by Germany's solid growth performance - the eurozone lost economic momentum as the region's political leaders battled to get ahead of the unfolding debt crisis.

This also helped to trigger tensions across Europe's political establishment after officials struggled to come up with solutions to the debt crisis, which has dragged on for more than two years.

In particular, Germany has clashed with its European partners over calls for the European Central Bank to take a more aggressive role in combating the crisis and for the eurozone to introduce common so-called eurobonds to help cash-strapped member states finance their debt.

Underscoring the deepening concerns about the eurozone's economic prospects, the ECB has moved to back up political efforts by delivering two interest rate cuts in two consecutive months and a package of emergency measures to shore up the financial system.

Government attempts to come to grips with the crisis have not only prompted demonstrations in major European cities - often turning violent - but have also toppled four governments at the heart of the crisis - in Portugal, Spain, Italy and Greece.

This month European leaders finally agreed to a new so-called fiscal pact aimed at tightening up budget discipline, which has at least helped to demonstrate to markets that the region's political class is now firmly focused on trying to bring the crisis to an end.

In a further bid to keep key eurozone economies on a path to budget consolidation, the elected governments in Athens and Rome have been replaced by technocratic administrations with the sole mandate of slashing their nations' high deficit and debt levels.

The deep divisions in the 27-member European Union - exposed by recent Franco-German efforts to drive through tougher budget controls, from which Britain chose to isolate itself - have added to the brittle economic mood prevailing in Europe.

But the eurozone is also being overshadowed by the threat of further credit downgrades by international rating agencies, prompting fears of more economic and financial market turbulence.

Whatever hopes have been generated by the European leaders' agreement on budget discipline, the debt crisis appears to be more entrenched now than it was 12 months ago, as the upheaval has spread to two of the region's key economies - Italy and Spain.

This has helped to spark turmoil in the normally staid world of eurozone bond markets, as investor concerns have grown about how governments in the currency bloc will be able to pay down their debts at a time of slowing economic growth.

In addition to signs that world economic growth is losing economic momentum, many eurozone states have been forced to launch tough austerity programmes in a bid to knock their state finances into shape to meet the strict fiscal targets for euro member states.

Meanwhile, economists have regularly revised down their economic outlook for the eurozone.

After forecasting a 2012 expansion rate of a modest 1.3 per cent in its last projections released in September, the ECB said in early December that it now expected the eurozone economy to grow by a paltry 0.3 per cent next year, after growing 1.6 per cent in 2011.