European economies stagnate

Posted August 9, 2008

European business is suffering, but companies won’t get much relief from the European Central Bank — despite the euro zone’s decline in economic activity.

by Der Spiegel

Baltimore — (TFN): The euro zone is feeling the pinch from disparities among its member states, which have escalated domestic issues into regionwide economic problems.

The main culprits are the so-called PIGS: Portugal, Italy, Greece, and Spain. After posting above-average growth since joining the euro zone in 1997, the countries’ economies are now stalling due to a cutback in bank lending and an increase in loan defaults. Outstanding corporate debt in Spain, which until recently accounted for a third of Europe’s growth, currently stands at 127 percent of GDP. As most of that is linked to the country’s floundering construction industry, banks are unwilling to continue financing the sector, which means bankruptcies — and job losses — are starting to add up.

“Things are looking pretty gloomy for Spain for the rest of this year and into 2009,” says Ben May, European economist at consultancy Capital Economics in London, who expects Spanish domestic growth to slow to 1.7 percent this year, from 3.8 percent in 2007.

Not that Spain is the only country to fall afoul of the credit markets. Both Italy and Portugal have bulging corporate debts of almost 100 percent of GDP, which has brought industrial growth almost to a standstill. The Italian economy is expected to increase a mere 1 percent this year, and Portugal should post a 1.2 percent rise in GDP for 2008. Even the Greek economy, which is predicted to boast an above-average growth rate of 3.4 percent this year, is faltering due to a downturn in the country’s manufacturing sector.

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