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Despite Germany’s strong manufacturing output in March, it was not enough to compensate for a slump across the rest of the Eurozone with declining production, a signal that an expected recession may not be as mild as policymakers hope. Industrial production in the 17 Eurozone countries declined 0.3 percent in March when compared with February, according to the European Union’s (EU) statistics office Eurostat. Economists had expected a 0.4 percent increase.
The figures stood in stark contrast with German data showing output in the Eurozone’s largest economy rose 1.3 percent in March, according to Eurostat, 2.8 percent when energy and construction are taken into account. “With the debt crisis, rising unemployment and inflation, household demand is weak and globally economic conditions are sluggish, so that is making people very reluctant to spend and invest,” said Joost Beaumont, a senior economist at ABN Amro.
According to Eurostat, output declined 1.8 percent in Spain; in France — the Eurozone’s second largest economy after Germany — output fell 0.9 percent in March. Many economists expect Eurostat to announce that the Eurozone went into its second recession in just three years at the end of March, with households suffering the effects of austerity programs designed to slash debt and deficits.
“Industrial production is a timely reminder that first-quarter GDP will likely show a contraction,” said Martin van Vliet, an economist at ING. “With the fiscal squeeze unlikely to ease soon and the debt crisis flaring up again, any upturn in industrial activity later this year will likely be modest.” European officials believe that the slump will be mild, with recovery in the 2nd half of this year. The strong economic data seen in January has unexpectedly faded point to a deeper downturn, with the drag coming from a debt-laden south, particularly Greece, Spain and Italy.
Economists polled by Reuters estimated the Eurozone economy contracted 0.2 percent in the 1st quarter, after shrinking 0.3 percent in the 4th quarter of 2011. “We suspect that a further slowdown in the service sector meant that the wider economy contracted by around 0.2 percent last quarter,” said Ben May, an economist at Capital Economics. “What’s more, April’s disappointing survey data for both the industrial and service sectors suggest that the recession may continue beyond the first quarter.”
“It is evident that Eurozone manufacturers are currently finding life very difficult amid challenging conditions,” said Howard Archer at IHS Global Insight. “Domestic demand is being handicapped by tighter fiscal policy in many Eurozone countries, still squeezed consumer purchasing power, and rising unemployment.” Eurozone governments have introduced broad austerity measures in order to cut debt, and these have undermined economic growth.
European watchers also expect to see Greece exit the Eurozone. Writing for Forbes, Tim Worstall says that “As Paul Krugman points out, the odds on Greece leaving the Eurozone are shortening by the day. In and of itself this shouldn’t be all that much of a problem for anyone. Greece is only two percent of Eurozone GDP and it will be a blessed relief for the Greeks themselves. However, the thing about the unraveling of such political plans as the Euro is that once they do start to unravel they tend not to stop.”
The European Commission hopes Greece will remain part of the Eurozone but Athens must respect its obligations, the European Unions executive Commission said. “We don’t want Greece to leave the Euro, quite the contrary – we are doing our utmost to support Greece,” European Commission spokeswoman Pia Ahrenkilde Hansen said. Greece is likely to face new elections next month after three failed attempts to form a government that would support the terms of an EU/IMF bailout. Opinion polls show most Greeks want to stay in the Eurozone, but oppose the harsh austerity imposed by the emergency lending program. “We wish Greece will remain in the euro and we hope Greece will remain in the euro … but it must respect its commitments,” according to Ahrenkilde. “The Commission position remains completely unchanged: we want Greece to be able to stay in the Euro. This is the best thing for Greece, for the Greek people and for Europe as a whole,” she said.
European Central Bank (ECB) policymakers Luc Coene and Patrick Honohan voiced the possibility that Greece might leave the currency bloc and reached the conclusion that it will not be fatal for the Eurozone. According to Luxembourg’s Finance Minister Luc Frieden “If Greece needs help from outside, the conditions have to be met. All political parties in Greece know that.” There are powerful incentives for keeping Greece stable, one of which is that the ECB and Eurozone governments are major holders of Greek government debt. A hard default could mean heavy losses for them; if the ECB needed recapitalizing as a result, that debt would fall on its members’ governments, with Germany first in line. “If Greece moves towards exiting the Euro…the EU would then need to enlarge its bailout funds and prepare other emergency measures,” said Charles Grant, director of the Centre for European Reform think-tank.
Meanwhile, Britain’s Deputy Prime Minister Nick Clegg warned euro skeptics to avoid gloating over the state of the Eurozone as Greece tries to assemble a workable government. According to Clegg, “We as a country depend massively on the prosperity of the Eurozone for our own prosperity, which is why I can never understand people who engage in schadenfreude – handwringing satisfaction that things are going wrong in the euro. We have an overwhelming interest – whatever your views are on Brussels and the EU – in seeing a healthy Eurozone. That’s why I very much hope, buffeted by these latest scares and crises in Greece and elsewhere, that the Eurozone moves as fast as possible to a sustainable solution because if the Eurozone is not growing and the Eurozone is not prosperous it will be much more difficult for the United Kingdom economy to gather momentum.”