By DAVID McHUGH, Associated Press
FRANKFURT, Germany — Europe is searching for something to get growth going again and pull the eurozone's heavily indebted countries out of their troubles — but with little luck.
Unemployment and manufacturing indicators suggest the 17 countries that use the euro are headed for a recession. Adding to these worrying signs is the realization that many of the traditional tools to give growth a shove — government spending, tax cuts and lower central bank interest rates — are off the table.
The absence of growth will be a big concern for European Central Bank President Mario Draghi and the bank's governing council when they meet Wednesday to decide the eurozone's benchmark interest rate. No change in the rate — which is at a record low of 1 percent — is expected this time around.
A recent round of economic indicators will be prominent in the governing council's minds when it meets. On Monday, the Markit index of industrial activity for the eurozone strongly suggested that the region's economy is still contracting after shrinking 0.3 percent in the last three months of 2011. Two straight quarters of falling output are a common definition of recession. Meanwhile, unemployment across the 17-country group crept up to a record 10.8 percent, official figures also released on Monday showed. And national jobless rates paint an even more disturbing picture — especially among the countries hit worst by the debt crisis: Spain at 23.6 percent unemployed, Greece 21.0 percent, Ireland 14.7 percent.
The European Union's executive commission estimates that the eurozone economy will shrink by 0.3 percent this year, while Greece faces shrinkage of 4.4 percent in the fifth year of a deep recession. Italy faces a 1.3 percent drop in output according to commission forecasts while Spain will fall 1.0 percent.
Short-term answers are scarce. The debt crisis hitting the eurozone means governments can no longer spend their way out of a downturn— in fact, they are doing the opposite and embarking on rounds of austerity cuts.
On top of this, the ECB is restrained from cutting interest rates by the eurozone's stubbornly high inflation rate, which has been pushed up by oil prices and some taxes to an annualized 2.6 percent. The ECB is concentrating on getting price increases down to under 2 percent. Lowering interest rates tends to push inflation up.
The region could even face the prospect of so-called "stagflation" — a period of no or very little economic growth accompanied by inflation — according to Carsten Brzeski, an economist at ING.
"The fact that the recovery of the eurozone economy would be slow and bumpy was already clear," Brzeski wrote in a note to investors.
"Now, high energy prices have even increased the risk of stagflation in the eurozone, a worst-case scenario which should cause concern at the Eurotower in coming months" — a reference to the ECB's Frankfurt skyscraper headquarters.
Brzeski adds that the stubborn inflation rate meant that "further rate cuts should be off the table".
Another weapon in the ECB's arsenal has also been put beyond use. The €1 trillion program of "all-you-can-eat" loans to banks in December and February did manage to take some heat off the debt crisis that was crippling governments including Spain and Italy. Some banks used the cheap money to snap up government debt that paid a higher interest rate. The program has helped lower costs at which governments borrow on the financial markets and stopped the economic malaise from becoming much deeper.
But the ECB loans are seen as a stopgap at best. The bank is currently in a holding pattern before it can start further, similar, measures as it waits to see whether that money finds its way through to loans to businesses and the wider economy.
The problem remains: Countries that don't slash spending risk being unable to borrow money from bond investors because the borrowing costs set by those investors — the so-called yields — are too high. Once they are of cut off from the bond market by prohibitively high yields, a bailout is the only alternative to default. Greece, Ireland and Portugal have already been forced to seek help from the other eurozone member countries and the International Monetary Fund.
Reader Comments