ADVERTISEMENT
News » Money
Aug 14, 12:54 PM EDT

As France and Germany falter, 18-country eurozone shows zero growth in second quarter


AP Photo
AP Photo/Christian Charisius
World Video

Buy AP Photo Reprints
Multimedia
A district summary of the Beige Book
Measuring economic stress by county nationwide
Mall malaise: shoppers browse, but don't buy
Unemployment by the numbers
Family struggles with father's unemployment
Saying an affordable goodbye
Hard times hit small car dealer
Latest Economic News
In Zimbabwe, the passport office is first stop in search for employment elsewhere

Bank of England board divided for the first time since 2011 on whether to raise interest rates

Yields on Irish bonds fall to record lows after credit upgrade, forecasts of solid 2014 growth

Hong Kong cuts growth forecast as economy slows on drop in Chinese tourist spending

As France and Germany falter, 18-country eurozone shows zero growth in second quarter

Bank of Korea cuts key interest rate to 2.25 percent for 1st time in 15 months

France abandons growth target after economy stagnates in 2nd quarter

Germany's economy loses momentum, decreases 0.2% in second quarter

Pace of Greek recession slows to lowest in nearly 6 years, at 0.2 percent in 2nd quarter

US retail sales basically flat in July; recent job growth fails to boost consumer spending

Interactives
Greece's Debt Threatens to Spread
State budget
gaps map
Auto industry problems trickle down, punish Tennessee county
Women give old Derby hats a makeover in tough economy
S.C. town deals with highest unemployment in South
How mortgages were bundled and sold as securities
Tracking the $700 billion financial bailout
Tracking the year's job losses
State-by-state foreclosures since 2007
Credit crisis explained
Presidents and their economic legacies
Lexicon of the financial crisis
Americans' addiction to debt

FRANKFURT, Germany (AP) -- Well, that didn't last long.

After four quarters of meager growth, the fragile economic recovery in the 18-country eurozone creaked to a halt in the second quarter.

Growth was zero. After only 0.2 percent in the first quarter.

Now who will get out and push? The European Central Bank, with a further monetary stimulus? Or governments in France and Italy, which have dragged their heels in making their economies more business-friendly?

Either or both could help. Especially if the Ukraine crisis mushrooms with a Russian invasion that would scare off business investment even more - and extend one bad quarter into an outright recession.

Few economists think the eurozone will slip back into its third recession in six years. Most expect only a slow recovery as Europe continues to work down its debts and that's not ideal for a global economy that's a long way short of firing on all cylinders.

In short, the eurozone remains a potential drag on the rest of the world.

"I don't think today's numbers make that picture any worse," said Tom Rogers, senior economic adviser to the EY eurozone forecast. "It's still going to be a slow recovery for the eurozone and it will be a slow recovery for eurozone markets for imports from the rest of the world."

Here's what happened:

SILENT SPRING: Germany let everyone down by shrinking 0.2 percent in the second quarter from the previous three-month period. Economists aren't too concerned because they think a lot of the growth simply migrated to the first quarter because of a very warm winter that let construction start early. Europe's biggest economy remains the continent's standout performer. It has low unemployment and took steps to cut business taxes and costs years ago.

RUMORS OF WAR: The "Putin effect," as economists at Berenberg Bank call it, comes from fears that Russian President Vladimir Putin may back an invasion of eastern Ukraine where pro-Russian separatists are fighting Ukrainian government forces. That worry is making businesses hesitant to invest. Though eurozone exports to Russia are only 0.8 percent of the bloc's annual gross domestic product, the crisis has hurt business confidence - executives are wary of risking cash for expansion, just as they were getting their mojo back after the debt crisis of the past few years. Business surveys like Germany's Ifo show the fear is taking hold.

Ukraine fears have only grown since the end of the quarter on June 30. Since then, the shooting down of Malaysia Airlines Flight 17 over Ukraine on July 17 - by a missile from territory held by pro-Russian separatists, according to the U.S. and Ukraine - has increased tensions dramatically.

THE USUAL SUSPECTS: Stagnating France and Italy are balking at politically tough reforms that would lower costs for businesses. France's economy was flat in the second quarter. Italy's shrank 0.2 percent, for the 11th drop in the past 12 quarters. So-called structural reforms include easing rigid rules on hiring and firing, and especially in Italy's case, reducing choking bureaucracy and corruption. France has tried cutting payroll taxes to help business but further steps have stalled. Italy's Prime Minister Matteo Renzi came into office six months ago promising fast change, but now says reforms will be rolled out over the next 1,000 days.

WHO'S PERIPHERAL NOW? This time it was Europe's core economies that were the problem, even as smaller, so-called peripheral economies are recovering from the debt crisis that ravaged the currency unions. Spain and Portugal both showed robust growth of 0.6 percent.

And Greece, the country at the forefront of the debt crisis which has seen its economy shrink by around a quarter over the past few years, is on the mend. Its economy was only 0.2 percent smaller than it was the year before, the smallest rate of decline in nearly six years. Greece does not report quarterly figures.

THINK GLOBALLY: Since the eurozone and its population of around 330 million accounts for 17 percent of world GDP in dollar terms, its stuttering performance is a weight on the global economy. Europe lags the U.S., which grew 1.0 percent from the quarter before, according to the EU's statistics office Eurostat. It's safe to say this European performance isn't what U.S. automakers like General Motors and Ford wanted to see. However, the eurozone did better in the quarter than Japan, which shrank by a hefty quarterly rate of 1.7 percent after a new sales tax turned off consumers.

QE, TOO? The European Central Bank will likely hear more calls for it to roll out more monetary stimulus for the flagging economy. It could do that by buying large amounts of financial assets such as government bonds, using newly created money - something only a central bank can do. It's called quantitative easing, or QE. In theory, it could drive down longer term interest rates even more and pump new money into the financial system in hopes of seeing it appear as loans to companies and consumers. But it's tricky in a currency zone with 18 different members.

The ECB is watching another worrisome indicator. Inflation is too low at 0.4 percent and that is raising fears of a downward price spiral that kills growth by making consumers delay spending in hopes of cheaper bargains down the line.

The ECB has already cut its key interest rate to a record low of 0.15 percent and is offering cheap loans to banks. It says it's waiting to see how those steps work, and could do QE only if things take a serious turn for the worse.

ECB head Mario Draghi has pushed back on governments, saying they're the ones who have to make the tough changes.

Italy's troubles come from too much red tape, he said at his last news conference: "That has nothing to do with monetary policy."

© 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Learn more about our Privacy Policy and Terms of Use.

 
ADVERTISEMENT