Europe Teeters on the Edge of Recession

By PAN PYLAS

LONDON -- Europe is edging closer to recession, dragged down by the crippling debt problems of the 17-country euro bloc, official figures showed Tuesday.

Eurostat, the European Union's statistics agency, revealed that the economies of both the eurozone and the wider 27-country EU shrank by a quarterly rate of 0.2 percent in the second quarter of the year. In the first quarter, output for both regions was flat. A recession is officially defined as two straight quarters of falling output.

Europe's stumbling economy is making it harder for other economies around the world to recover and policymakers from all round the world are urging more decisive action, particularly from the European Central Bank, to deal with the crippling debt crisis to restore confidence to the global economy.

"The ECB's recent announcement that it will do 'whatever it takes' to save the euro is welcome, but clarity over what will be done is crucial," said Tom Rogers, a senior economic adviser for accounting firm Ernst & Young.

The region is the U.S.'s largest export customer and any fall-off in demand will hit order books - as well as President Barack Obama's election prospects.

The eurozone is grappling with sky-high debt levels and record unemployment of 11.2 percent. Compared with the year before, the eurozone's economy is 0.4 percent smaller.

Without Germany continuing to post solid levels of growth, the eurozone would officially be in recession.

Europe's largest economy grew by a quarterly rate of 0.3 percent in the second quarter. Though down on the 0.5 percent recorded in the first quarter, the advance was a little more than expected - most economists thought Germany would only grow by 0.2 percent.

• <p> <span class="byline">By <span class="author vcard"> <span class="fn"> <a href="http://www.dailyfinance.com/tag/@motleyfool/"> Rich Smith, The Motley Fool </a> </span> </span></span></p> <p> With a national debt still hovering around 120% of its GDP, Greece is still far from being out of the fiscal woods. As austerity measures bite, Greece's GDP will shrink further and its debt-to-GDP ratio will rise, putting it on course for further defaults -- er, &quot;restructurings.&quot; Nor is Greece alone. According to official figures, debt-to-GDP ratios elsewhere are similarly high.</p> <p> Photo: Gerasimos, an 83-year-old Greek man, picks through a heap of rubbish to salvage useful items as the marble gate of the Roman Agora is reflected in a mirror, in the Plaka district of Athens on Monday, March 12, 2012. Greece implemented the biggest debt writedown in history on Monday, swapping the bulk of its privately-held bonds with new ones worth less than half their original value. (AP Photo/Petros Giannakouris)</p>
• <p> Debt-to-GDP ratio: 130%</p> <p> </p> <p> Photo: President of Iceland &Oacute;lafur Ragnar Gr&iacute;msson prior to voting in a referendum in Reykjavik, Iceland, Saturday, March 6, 2010.&nbsp;&nbsp; Icelanders voted &quot;no&quot; in a nationwide referendum on approving the use of $5.3 billion of taxpayers' money to repay international debts.&nbsp; The &quot;no&quot; vote may complicate Iceland's effort to recover from a deep recession and a banking collapse. (AP Photo/Brynjar Gauti)</p>
• <p> Debt-to-GDP ratio: 120%</p> <p> </p> <p> Photo: A man reads a newspaper in Milan, Italy, Monday, Jan. 30, 2012. European leaders are trying to come up with ways to boost economic growth and jobs, which are being squeezed by their own governments' steep budget cuts across the continent. The 27 EU leaders meeting in Brussels are also looking for common ground on a new treaty to toughen spending rules to dig the continent out of a crippling debt crisis. (AP Photo/Luca Bruno)</p>
• <p> Debt-to-GDP ratio: 110%</p> <p> </p> <p> Photo: Workers seen at the Luis Onofre&acirc; luxury shoe factory in Oliveira de Azemeis, Portugal, Friday, Feb. 24, 2012. Debt burdens are rising fastest in European countries that have enacted the most draconian austerity programs. Portugal's unemployment rate hit a record 14 percent at the end of last year and the government imposed austerity measures to slash costs: Portugal cut pensions, reduced public servants' wages and raised taxes starting in 2010. (AP Photo/Paulo Duarte)</p>
• <p> Debt-to-GDP ratio: 105%</p> <p> </p> <p> Photo: People walk past a beggar on a bridge in Dublin Monday Feb. 20, 2012. Bank of Ireland, the only one of Ireland's six banks to avoid nationalization, reported it returned to net profit in 2011 thanks to heavy debt restructuring in the face of continued losses from dud loans. (AP Photo/Shawn Pogatchnik)</p>
• <p> Debt-to-GDP ratio: 102%</p> <p> </p> <p> Photo: The shadow of Republican presidential candidate, former Massachusetts Gov. Mitt Romney, is seen on a representation of the National Debt Clock as he spoke at a town hall meeting in Kalamazoo, Mich., Friday, Feb. 24, 2012. (AP Photo/Gerald Herbert)</p>
• <p> Debt-to-GDP ratio: 85% each</p> <p> </p> <p> Photo: Reflected in a window, people walk in London's City financial district, Tuesday, Feb. 14, 2012. Britain's AAA credit rating was put on a &quot;negative outlook&quot; by ratings agency Moody's, amid fears over weaker growth prospects and potential shocks from the eurozone crisis. Britain's Chancellor George Osborne said the assessment was a vindication of the Government's tough austerity measures and &quot;a reality check for anyone who thinks Britain can duck confronting its debts&quot;. Moody's downgraded the ratings of six countries and also put France and Austria on the same caution as the UK amid violent protests in Greece. (AP Photo/Lefteris Pitarakis)</p>
• <p> Debt-to-GDP ratio: 82%</p> <p> It makes you wonder: Who will be next in line to default? And when they do, will we call that &quot;good news,&quot; too?</p> <p> </p> <p> Photo: A pedestrian looks at a sign in a shop reading: ''One euro, price haircut'' in Athens on Thursday, March 8, 2012. (AP Photo/Thanassis Stavrakis)</p>
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Though Germany currently benefits from strong demand for its products, its high-value exporters are finding it increasingly difficult to tap international markets. Forward-looking surveys, including Tuesday's closely-monitored ZEW survey of German investor sentiment, are suggesting that confidence is taking a knock as Europe moves from one crisis point to another.

The other 16 countries that use the euro are Germany's biggest export market and six of them are in recession. The U.S. is also coming off the boil, with growth in the second quarter down compared to the previous three months at 0.4 percent, according to Eurostat.

Slower economic growth is also making it harder for governments and central banks to control the debt crisis in Europe. Shrinking economies make it more difficult to get the public finances into shape. Lower output dents tax revenues while forcing up the cost of social benefits.

"The big picture is that the economic growth required to bring the region's debt crisis to an end is still nowhere in sight," said Jonathan Loynes, chief European economist at Capital Economics.

For those countries at the front-line of Europe's debt crisis, the figures make for grim reading. Unsurprisingly, Greece is faring the worst - its economy is 6.2 percent smaller than a year ago and back at the level it was in 2005.

Portugal, which has also been bailed out and enacting the tough austerity medicine, suffered a big 1.2 percent drop in output in the second quarter, compared with the previous quarter's modest 0.1 percent drop.

Italy and Spain, the eurozone's third and fourth largest economies, shrank by 0.7 percent and 0.4 percent respectively in the second quarter. Both countries are struggling to convince markets they have a strategy to get a grip on their debts. Spain has even acceded to a bailout of its banks.

Alexander Schumann, chief economist at The Association of German Chambers of Industry and Commerce, urged Europe's indebted countries to carry on with their reforms and that it won't be long before they start reaping the rewards.

"We need to be patient but there are positive signs that in 18 or 24 months we might see light at the end of the tunnel in Portugal, Spain, Italy and Greece, "he said. "We can get there if politicians don't block the tunnel with ideas that add new uncertainty."