European economic downturn gathers pace

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By ROBERT BARR, Associated Press

LONDON (AP) — Any hopes for recovery for Europe's faltering economies suffered a series of blows Wednesday following the latest round of bad news from the debt-ridden region.

Official figures showed Britain, which does not use the euro and has Europe's third-largest economy, slipped deeper into recession as the government pressed on with tax hikes and spending cuts to reduce debt.

Meanwhile, surveys showed demand for loans remained weak across the 17-country eurozone, suggesting no economic recovery is imminent, and business confidence continued to fall in Germany, Europe's largest economy and its pillar of growth — so far.

Conditions remained tense in Spain, where the government's borrowing rates hovered at unsustainable levels, threatening to force it to seek outside help to finance its debt.

Wednesday's news showed that the economic crisis is gathering pace and spreading — not only among the weak eurozone states like Spain, but also in bigger economies like Germany and outside the currency zone, in the U.K.

Financial markets, which had been rattled earlier in the week by problems in Spain, were largely steady. While Germany's DAX rose 0.3 percent, Britain's FTSE fell almost 0.1 percent. The euro made up for only some of the previous days' losses, trading 0.8 percent higher at $1.2158.

BRITISH RECESSION

The biggest shock of the day came from the U.K.'s second quarter GDP figures, which showed economic output shrank by 0.7 percent in the April-June quarter, compared with the previous three months. That was far worse than the 0.2 percent decline economists had expected.

The figures have heaped pressure on the U.K. government to ease up on its tough austerity approach. The Conservative-led coalition government came to power two years ago pledging to focus on deficit reduction. Now many, particularly the opposition Labour Party, think the approach has been heavy handed and is choking the life out of the economy.

Last week, the International Monetary Fund said Prime Minister David Cameron's government would have to ease up on budget-cutting if the economy fails to rebound strongly. The IMF cut its forecast for U.K. growth this year to 0.2 percent from 0.8 percent. After today's data, several analysts expect it to contract by as much as 0.5 percent.

British Treasury chief George Osborne blamed the economy's problems on debts run up by the previous Labour government and the impact of the eurozone crisis.

"We all know the country has deep-rooted economic problems and these disappointing figures confirm that," Osborne said.

SPAIN

The biggest concern in the eurozone is whether Spain will need a sovereign bailout. That threat remained alive on Wednesday.

The country's borrowing rates in bond markets have soared amid fears about its ability to keep a handle on its debts. The interest rate on its benchmark ten-year bond spiked another 0.11 percentage points to 7.65 percent in the first hour of trading Wednesday, before easing back to 7.37 percent.

A rate above 7 percent is deemed untenable over a period of months — Spain has been suffering it for several weeks. Should Madrid find it too expensive to raise money from bond markets at such rates, it would have to ask for an international bailout like those sought by Greece, Ireland or Portugal.

Spain denies it will need financial rescue for its public finances, but many investors think it's only a matter of time.

The prospect of bailing out Spain — the eurozone's fourth-largest economy — is worrisome for Europe because the cost would put a massive strain on its existing emergency funds.

In June, eurozone countries agreed to lend Spain up to €100 billion ($121 billion) to save those of its banks that are laden with soured investments following a property sector collapse in 2008.

Officials hoped the bailout loans would help Spain's government. But the deal only intensified concerns about Spain's debt levels, since the government will have to repay those loans if the banks cannot.

To solve that problem, eurozone ministers agreed to give the loans directly to the Spanish banks — but only after a Europe-wide banking regulator is set up. That could take months, if not years. France and Spain said this step should be sped up and completed by the end of the year.

"The swift implementation of the financial assistance program is essential to restore confidence and recreate conditions for growth," French Finance Minister Pierre Moscovici and Spanish Economy Minister Luis de Guindos said in a joint statement after talks in Paris on Wednesday.

EUROPEAN CENTRAL BANK

Concerns over the economy and job losses are weighing down on demand for loans from business and consumers in the eurozone, according to latest figures from the ECB.

In the past six months, the ECB has cut interest rates to record lows and given banks massive amounts of cheap loans. But even when loans are available, firms and households are too worried about the future to borrow, according to the ECB's quarterly lending survey of senior loan officers at 130 banks.

Banks saw also saw a strong decline in demand for loans for consumers for durable goods — big-ticket items that last for several years, such as cars and home appliances.

Many countries in the eurozone are in recession as they grapple with their debts. Even Germany, Europe's biggest economy, is showing increasing signs of slowing down.

GERMANY

Business confidence in Germany fell further than expected in July, according to the influential Ifo institute. Its confidence index fell for the third consecutive month, from 105.2 in June to 103.3 points in July — the lowest level since March last year.

Germany so far has been relatively unaffected by the debt troubles rocking the rest of Europe. Its economy has enjoyed two years of strong growth, helped by strong exports and increasingly robust domestic demand.

However, with concern mounting about Spain's financial troubles and new questions over Greece's future in the eurozone, Germany could be hit on two fronts: declining demand for its goods from abroad and demands for more money to keep the eurozone afloat.

FRANCE

The economic uncertainty is slamming big companies such as carmakers.

PSA Peugeot Citroen, the maker of two-thirds of France's cars, reported a first-half loss of €819 million ($990 million) on Wednesday, blaming the deepening recession in many markets in Europe. The company's share price has more than halved since March.

To help companies like Peugeot, the French government on Wednesday unveiled a plan to turn the auto sector around by helping it develop and sell environmentally-friendly vehicles.

It is uncertain, however, how much the plan will help in the face of a global economic downturn.

The French government will increase the rebates French consumers receive for buying an electric or hybrid car. It expects to pay out around €500 million ($600 million) in such rebates next year.

It will also offer several hundred millions of euros of incentives to carmakers and their suppliers that invest in green technology or create new jobs. Much of the money for those incentives, however, comes from funds already budgeted that are being redeployed.

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Ciaran Giles in Madrid, David McHugh in Frankfurt, Geir Moulson in Berlin and Sarah DiLorenzo in Paris contributed to this report.

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