Eurozone slumps back into recession after austerity cuts

Output drops across single currency bloc as economists warn of no early end to crisis

The Independent
Ben Chu

The eurozone has double-dipped back into its second recession in three years, official figures confirmed yesterday – and analysts warned economic pain across the single currency will continue well into 2013.

Output across the 17-member bloc fell by 0.1 per cent over the third quarter of 2012, following a 0.2 per cent decline in the second quarter, according to Eurostat.

The picture across the Continent was uneven with France and Germany both eking out 0.2 per cent growth between July and September, while The Netherlands and Austria showed declines. Meanwhile, the crisis-hit states of Spain, Italy and Portugal, which have been in recession all year, shrank once again. Protesters in all three countries took part in anti-austerity demonstrations on Wednesday.

Economists predict weakness among the currency bloc's southern states to drag Germany and France into recession too in the coming months, with most expecting Europe's dominant economy to register negative growth in the fourth quarter of the year.

The European Commission has forecast that the bloc will shrink by 0.4 per cent over the course of 2012 and expand just 0.1 per cent in 2013.

The slowdown is making it more difficult for eurozone member states to hit their targets under the Fiscal Compact, which compels them to bring deficits down to 3 per cent of GDP.

The European Commission, which polices the Compact, showed some signs of flexibility on deficit reduction this week when the EU economic commissioner, Olli Rehn, said that Spain would not be required to make more cuts this year to compensate for being thrown off course by recession. But he added that Brussels would "look at every country case by case".

Paul De Grauwe of the London School of Economics said that the latest downturn had been brought on by the drastic spending cuts already enacted in southern Europe.

"We are getting into a double-dip recession which is entirely self-made," he said. "It is a result of excessive austerity in southern countries and unwillingness in the north to do anything else."

Steen Jakobsen, the chief economist at Saxo Bank, agreed, saying: "This was totally expected because of austerity policies combined with world growth slowing down and a fall in activity in Germany and the Netherlands."

Separate figures this week showed the Greek economy shrank at an annual rate of 7.2 per cent in the third quarter, up from 6.3 per cent in the previous three months. The International Monetary Fund yesterday reiterated its call for the European Central Bank and the European Union to write off more of the country's debt.

"The IMF has done what it needs to do in the context of its framework," the fund's spokesman William Murraysaid. "Clearly there has to be other actions taken to reach debt sustainability."

Athens' public debt is expected to hit 190 per cent of GDP next year. Greece is facing a sixth-successive year of contraction in 2013.

There was, however, a flicker of good news for Ireland yesterday as the Fitch credit rating agency upgraded its outlook for the country's BBB sovereign bonds, citing its success in cutting the deficit and return to capital markets.

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