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Euro Zone Economy Shrinks; Recession Returns in France Euro Zone Economy Shrinks, but Little Sign of Action
(about 1 hour later)
PARIS — Europe is slipping further into recession. PARIS — The euro zone economy shrank for a record sixth consecutive quarter in the first three months of the year, according to data released Wednesday. But when European heads of state meet next week in Brussels, don’t look for any big announcements about plans to stimulate growth.
The euro zone economy shrank more than expected in the first three months of 2013, official data showed Wednesday, as France returned to recession for the first time since 2009 and Germany barely edged forward. Europe, experts say, seems to be in policy paralysis. With Germany, the Continent’s economic heavyweight, in the grip of pre-election politicking, no big European policy moves are likely until after that country’s elections in September. Even then, it is not clear that anyone has any masterstrokes planned.
It marked the longest recession for the euro countries since the currency was introduced in 1999. “The political situation in Europe is not conducive to making bazooka decisions,” said Gilles Moëc, an economist at Deutsche Bank in London, referring to an allusion by Henry M. Paulson Jr., a former U.S. Treasury secretary, to the need to have economic firepower in a crisis. “No one’s talking about creating any further jolts to the system.”
The 17-nation euro zone contracted by 0.2 percent in the first quarter from the last three months of 2012, Eurostat, the statistical agency of the European Union, reported from Luxembourg. That was less than the 0.6 percent decline recorded in the fourth quarter, but more than economists’ expectations of a 0.1 percent fall. While Germany was able to barely sidestep a recession in the first quarter, France slid into one, according to the data Wednesday from Eurostat, the European Union’s statistical agency. The French president, François Hollande, marked the occasion at a news conference in Brussels by indicating that his country should not be singled out for criticism.
The economy of the overall European Union, made up of 27 nations, shrank by 0.1 percent. “Are we an isolated case?” Mr. Hollande said of France. “No, because the recession in Europe and particularly in the euro zone is greater.” But he offered no prescriptions for growth other than to say, “If Europe, member states and France organize ourselves to promote growth, then we can return to the hope of a better future.”
Germany, with the largest economy in Europe, was almost stagnant in the first quarter, managing growth of just 0.1 percent from the prior three months, when it shrank by 0.7 percent, the Federal Statistics Office reported in Wiesbaden. Organizing to promote growth, though, seems to be the mission that has long eluded the Union, whose listlessness contrasts with the performance of other major global economies.
France, the second-largest economy in Europe, contracted for a second consecutive quarter, meeting the common definition of a recession. The economy shrank by 0.2 percent, the same decline as in the fourth quarter of 2012. Two weeks ago, the European Central Bank cut its benchmark interest rate target to a record low in a largely symbolic move, but gave no hint of whether it had more in store. Economists say there is a limit to what monetary policy can accomplish, in any case.
French President François Hollande, at a news conference in Brussels after a visit with José Manuel Barroso, the president of the European Commission, suggested that the euro zone recession was primarily the result of belt-tightening policies advocated by northern European nations like Germany, Finland and the Netherlands. And the people perhaps most able to propose action — E.U. finance ministers — just spent two days in Brussels arguing over tax havens and debating a banking union, which is aimed at avoiding future disasters, not reviving growth.
France’s dip back into a contraction “has to be regarded as what has happened in the past, not what is going to happen in the future,” he said. “My view is that we’ve got past the most difficult moment. Now if Europe, member states and France organize ourselves to promote growth, then we can return to the hope of a better future,” he said. “We don’t see policy makers lifting a finger anywhere in Europe,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, said Wednesday. “But this is a depression, rather than a cyclical downturn, and there must be a policy response if things are going to get better.”
Mr. Barroso acknowledged that “we have to do more” to stimulate growth in Europe and that efforts announced last year had been sluggish. “We have to inject more urgency into these measures,” he said. Little wonder the European public is losing confidence in the region, as the results of a poll by the Pew research organization showed Monday.
Among the “peripheral” euro nations, Spain’s economy shrank by 0.5 percent, the same as Italy’s, Wednesday’s data showed. Portugal shrank by 0.3 percent, and Cyprus’s economy, the victim of a financial sector meltdown and bailout, shrank 1.3 percent. Data on Greece were not immediately available. The 17-nation euro zone economy contracted 0.2 percent in the first quarter from the last three months of 2012, Eurostat reported Wednesday. That was less than the 0.6 percent decline recorded in the fourth quarter, but more than economists’ expectations of a 0.1 percent fall.
More than five years after the meltdown of the U.S. housing market set off the global financial crisis, the 27-nation European Union remains in turmoil, buffeted by a lack of confidence in member states’ public finances and demands for budgetary rigor to address those concerns. Unemployment in the euro zone reached a record 12.1 percent in March, and economists do not expect the labor market to turn around before next year, at the earliest. France’s slip into recession was the result of a second consecutive quarterly contraction of 0.2 percent. (At least two consecutive quarters of a shrinking economy is the widely accepted definition of recession.) Germany essentially marked time, with growth of 0.1 percent. The economy of the overall Union, made up of 27 nations, shrank 0.1 percent.
Despite its troubles, the E.U. market remains the world’s largest, and its weakness is doubly worrying at a time when the rest of the world is not growing strongly enough to take up the slack. Moody’s Investors Service warned Wednesday that the weakness in the euro zone, combined with the mandatory “sequestration” budget cuts in the United States, would weigh on the world economy, with growth in the Group of 20 nations this year of just 1.2 percent, picking up to 1.9 percent in 2014. Eurostat said it was the first time the euro zone had contracted for six straight quarters since the creation of the single currency in 1999.
In annualized terms, the euro zone economy contracted by about 0.8 percent in the first quarter, lagging far behind the 2.5 percent growth in the United States. In annualized terms, the euro zone economy contracted about 0.8 percent in the first quarter. That is in stark contrast to the current2.5 percent annual growth rate in the world’s largest economy, the United States. China, with the second-biggest economy, reported in April first-quarter growth of 7.7 percent.
Japan, which reports its first-quarter G.D.P. figure on Thursday, is expected to post an annualized figure of about 2.8 percent. China in April reported 7.7 percent first-quarter growth. Japan, with the third-largest economy, is expected to post annualized growth of about 2.8 percent when it reports its first-quarter numbers on Thursday.
That Germany grew at all was a result of increased household consumption, Germany’s statistics agency said, as exports and investment declined. Jörg Krämer, chief economist at Commerzbank in Frankfurt, estimated in a research note that the unusually cold weather had subtracted as much as 0.2 percentage point from German growth. Europe’s economic doldrums are by no means the region’s problem alone. Despite its troubles, the Union remains the world’s single largest market, which means its weakness is retarding growth in the rest of the world.
Even though Germany eked out a positive figure, it was “really in contractionary territory” in the quarter, Philippe d’Arvisenet, global head of economic research at BNP Paribas, said. He said more recent data showed clear evidence of a German rebound in the second quarter. Moody’s Investors Service warned in a report Wednesday that the weakness in the euro zone, combined with the mandatory budget cuts in the United States, would weigh on the world economy. Those factors will help limit growth in the Group of 20 industrial nations to just 1.2 percent this year, Moody’s said.
Mr. d’Arvisenet estimated that the euro zone economy would shrink this year by about 0.5 percent, following a 0.6 percent contraction in 2012. Growth is likely to return in 2014, he said, “but probably below 1.0 percent.” The situation was different in late 2008 when, with the global financial crisis blazing, the Union undertook a round of coordinated fiscal stimulus — pumping money into the economy in concert with the United States and other nations, including China — that helped to keep the global economy afloat. Those days of coordinated action are long gone.

James Kanter contributed reporting from Brussels.

Now, only under crisis conditions, as when another euro zone country needs a bailout, do European leaders seem able to focus their attention and energy on collective problem solving. But those tend to be stop-gap measures, aimed at limiting losses, not long-term programs for stimulating growth.
The fixation on debt and deficits instead created a de facto euro zone policy of austerity budgets that was being preached by the richer countries of Northern Europe until only recently — even as the real economy was shrinking and unemployment in the euro zone was reaching its current record level of 12.1 percent.
Mr. Moëc, at Deutsche Bank, said low consumer demand, tight lending policies by a banking sector that is trying to shrink, and corporate revampings that have often involved layoffs were are contributing to a vicious circle of decline.
For most of Europe, Mr. Moëc said, “It’s a perfect combination of nasty headwinds.”
Philippe d’Arvisenet, global head of economic research at BNP Paribas, estimated that the euro zone economy would shrink about 0.5 percent this year, after a 0.6 percent contraction last year. Growth will probably return in 2014, he said, “but probably below 1.0 percent.”
Mr. Moëc said the only bright spots came from the fact that much of the pain of austerity had already been felt, and that Brussels now appeared amenable to giving countries like France and Spain more time to meet budget targets. A further decline in the value of the euro, which has fallen about 5 percent against the dollar since its recent peak in February, might also help, he noted, by making European companies’ overseas sales more profitable.
Mr. Weinberg, in New York, said that any impetus for change would have to come from Germany, because its budget surplus gave it room to maneuver that most other countries lacked. But, with elections looming, he was pessimistic about action anytime soon.
“I don’t know how to cook a story with a happy ending from the current policy settings,” Mr. Weinberg said.
James Kanter contributed reporting from Brussels.