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Euro zone sinks into the red

Latest update : 2008-08-15

It was the news governments across Europe have been dreading. The economies of France and Germany, and the euro zone as a whole, shrunk in the second quarter. The spectre of a continental recession is impossible to ignore.

Will it be dubbed D-Day or Black Thursday?

If Europe plunges into recession, Thursday, August 14 is likely to enter into that hall of financial history's infamous dates.

Germany was the first to start adding the minus signs to its results for gross domestic product: 0.5% negative growth in the last quarter. The figure is all the more stark when compared with German GDP increases for the first three months of the year, a robust 1.3%.

Less than 45 minutes later, France added another splash of red to the picture: its economy shrunk 0.3% in the last quarter.

And a short while later, the European Commission emptied the paint can onto the canvas: Euro zone GDP down 0.2%.

Of course, economists had been expecting those figures for weeks.

Finance chiefs like the European Central Bank (ECB) head, Jean-Claude Trichet, and his Bank of England counterpart, Mervyn King, have been telling us we're in for a rough ride.

But they've also danced around the R-word - recession - quite a bit, thinking Europe might be able to avoid the worst knock-on effects of the global slowdown.

On Wednesday King talked about a "chill in the air" and went only as far as describing the possibility of the UK's recording two successive quarters of negative growth - the technical definition of a recession.

France's finance minister, Christine Lagarde, also did her bit to head off recession talk moments after announcing the results on France Inter radio.

"It's not a question of talking about recession," she said.

Lagarde thinks that inflation, in France at least, has peaked and that the economy will start to pick up around the end of this year or the beginning of 2009.

That's a view shared by other governments, such as the UK.

Yet try telling that to people who see the signs of recession everywhere as well as record price hikes in fuel and groceries and a burst housing bubble after galloping rises - in the UK and Spain at least.

Even if Europe is over the worst of the knock-on effects of the global slowdown, growth isn't likely to resume until the ECB brings interest rates down from 4.25%.

Trichet has been keeping the rate on hold until he's sure that inflation has stopped rising; currently the inflation rate is more than double the ECB target of 2%.

But when? It's still going up all over Europe and likely to be compounded by higher wage demands.

The strengthening euro is hammering EU exports - a particular headache for Germany, the world's biggest exporter.

At best, we're in for a dose of stagflation - low growth and creeping inflation.

But at worst, we're marching into another quarter of negative growth, and if that's the case no one will be dancing around the R word anymore.

Date created : 2008-08-15

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