Europe has been in the second leg of a double-dip recession for nearly a year, officials announced Wednesday — a development that hardly comes as a surprise to the millions of workers protesting record-high unemployment in the streets of Athens and Madrid, or to many U.S. corporations with slumping sales on the continent.
The deepening woes in the Old World are the result of a toxic combination of sky-high interest rates in southern European countries where investors are boycotting the mountains of public debt they’ve amassed over the years, along with the severe cuts in spending and tax increases those nations are imposing to try to dig out of their debt holes.
The unfolding story of the European crisis poses a cautionary tale to political leaders in the U.S. who are just now tackling an accumulating federal debt load that is as big or bigger than those of many European countries, said Harm Bandholz, analyst at UniCredit Research.
The U.S. has enjoyed stronger growth than Europe in recent years because it has put off the tax increases and spending cuts needed to control its mounting debt, he said, but once it starts to impose austerity on its citizens next year, it too will pay a price in growth.
“Austerity measures generally inflict short-term pain,” even recession, if they are imposed abruptly, he said. “This is currently nowhere seen better than in Europe,” but the long-term payoff is nations such as Greece, Spain and Italy will eventually get their fiscal house in order, he said.
The Eurozone economy, which encompasses the 17 nations that share the euro currency, slumped into recession in the fourth quarter of last year, according to the Center for Economic Policy Research, a London research group that is the official arbiter of European recessions.
“The euro-area recession is very visible in labour markets,” the group said in a statement, noting that employment started declining even before the onset of the recession. “This is quite unusual, since employment is generally a lagging variable of output and was a lagging variable in the previous recession.”
The group said that the European labor market “may not have fully recovered from the previous recession” — the first leg of the double-dip downturn which was sparked by the 2008 financial crisis in the United States. The lingering effects of the earlier recession “may have caused employment to turn down so quickly” in the current downturn, it said.
The London group noted that the recession has not been felt evenly throughout the continent, where northern European countries have fared better than their southern counterparts, as a whole.
“France is muddling through,” while the economies of Germany, Austria, Finland and Estonia have continued to grow, it noted. Spain, Portugal and Greece — the countries at the center of the debt crisis — have experienced the biggest downturns.
Howard Archer, European economist at IHS Global Insight, said that overall the downturn in Europe has been “modest” — with output declining by 0.6 percent in the last year — because Germany and other northern European countries have remained strong.
But the overall mildness of the recession masks the severe stress in the worst-hit countries. The contraction in Greece, for example, has been a steep 7.3 percent in the past year.
Mr. Archer expects the deep downturn in southern Europe to prevent growth from re-emerging in the eurozone in the next year.
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