Friday, November 14, 2008

Official Eurozone Figures Show Slide Into Recession

Sources: Financial Times- Eurozone Enters First Recession; Wall Street Journal- Euro Zone Enters Recession; Wall Street Journal- Downturn Strikes Germany as Demand for Export Falls

Today official figures were announced showing a 0.2 % contraction of the eurozone GDP during the past two quarters. This marks the first recession since the region joined to share the euro currency in 1999. The 15-country region comprises 5 of the world’s top 10 economies. The reports show that recession began long before markets plummeted in October, hinting that the fourth quarter will be even worse.

Causes cited for the recession in Europe include backlash from the Lehman Brothers failure in the financial sector, high energy costs, less consumer spending on domestic products, job cuts, a strong currency that led to decreased exports, high foreign borrowing costs, and the failure of the European Central Bank to sufficiently cut interest rates.

Yesterday Germany, the world’s fourth largest economy, was the next country to release official data confirming a recession based on a 0.4 % and 0.5 % drop in the second and third quarters, respectively. It followed on the heels of Ireland, who entered recession back in January, and Italy who had the same GDP plunge as Germany. Spain's economy shrunk 0.2%, the first contraction since 1993. France cited a 0.3 % contraction in the second quarter but came out slightly ahead in the third quarter with 0.1 % growth. The numbers are comparatively weaker than the U.S., which experienced a 0.1 % loss in the second quarter but recovered for 0.7 % growth in the third.

As the EU preceded the U.S. in declaring official recession, it became clear that the crisis will play a larger role in Europe than originally thought. Analysts from the European Union statistics agency Eurostat expect a 0.3 % decline in the fourth quarter while the IMF recently predicted that the EU’s GDP will fall 0.9% in 2009. Such glum projections are likely to provoke EU leaders to have another go at collaborating on a regional bail-out plan or concerted system of capital injections when they next meet in Brussels on December 11th. They will also discuss ways to stop the spread of the crisis to other industries, such as the ailing auto industry.

Should the EU budget for capital injections into critical industries, such as automotives, in their next round of proposals? How should they determine which industries should be saved and which will have to fend for themselves? With the worldwide decline of exports, should Germany be rethinking its manufacturing-based economy or will staying away from the financial sector improve its outlook?

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