Eurozone Economies Shrink by 0.2%

The 15 countries that make up the eurozone saw their aggregate economic activity shrink by 0.2% in the April-June quarter. In the wider European Union, the contraction was just 0.1%. However, the two consecutive quarters of negative growth that defines a formal recession have already occurred in Estonia and possibly in Ireland, where second quarter figures have yet to be released. It looks like it will spread.

The problem is that the slow-down is fairly wide-spread and is affecting the larger economies at the same time. For example, the largest economy in the eurozone is Germany, which experienced a 0.5% decrease. France and Italy are also major economic forces in the eurozone, and their economies shrank 0.3% each. Spain balanced that out a bit, growing 0.2%, but that’s hardly enough to get excited about.

The three culprits here are the credit crunch that has slowed economic activity in a great many places, the rising euro that hurts European exporters in particular, and high oil prices. As French finance minister Christine Lagarde, said France’s trouble “mostly reflects the deterioration of our international context, which particularly weighed on our exports and which is common to all European countries.” She maintained, “The fundamentals of the French economy are healthy," but one isn’t so sure.

The obvious thing for the European Central Bank to do is cut interest rates to get the economies of the eurozone going again. That isn’t going to happen, though. Indeed, it raised rates to 4.25% last month to combat inflation. There won’t be a rate cut anytime soon either. Jörg Radeke from the Centre for Economics and Business Research told the BBC, “Although inflation has been stable at 4.0 % in July, it is still way above target. Hence, the possibility that the European Central Bank is cutting interest rates in 2008 to support the sickening economy is remote.”

Now that the euro is weakening against the dollar to a degree (and this could reverse itself readily enough) and now that oil prices are sliding from the $140 region, there is some hope that conditions for the next half year or so will be more conducive to economic growth in the region. For example, the German government expects a GDP growth rate of 1.7% in 2008 despite the second quarter’s decline. Hope springs eternal.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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