Southern Europe’s Recession Threatens to Spread North Published: Friday, 26 Apr 2013 | 1:37 AM ETBy: Jack Ewing
http://www.cnbc.com/id/100676316 No company symbolizes German industrial might like Daimler, the giant maker of Mercedes-Benz autos and trucks. So when the company said this week that it, too, had finally been caught in the downdraft of the European economic crisis, it was an ominous sign for all of the Continent, if not the whole world.
German exporters like Daimler have been bastions of stability on a continent burdened with shaky banks, dysfunctional governments and legions of unemployed youth — not to mention the worst auto industry slump in two decades. But Daimler's glum forecast for 2013 was the latest evidence that Germany, and other relatively healthy countries like Austria and Finland, risk falling into the recession that has long afflicted their southern neighbors.
The slowdown in Germany was foreshadowed by months of declining industrial output, said Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y. "The E.U. has made Europe a much more cohesive economy, which is good when things are going up," he said. "But when things are going down the multiplier is very strong. An outgoing tide lowers all ships."
The region's overall economic weakness as well as slowing demand in China and other big markets for German exports of consumer products, cars and sophisticated machine tools, industrial robots and construction equipment are finally taking their toll.
Just one more consecutive quarter of shrinking economic output and Germany would officially enter a recession. The same is true of Belgium, France, Luxembourg, Austria, even Sweden and Finland. The Netherlands has already suffered two quarters of declining gross domestic product.
Further evidence of the spreading European recession came Thursday, first from Madrid, where the Spanish government reported that unemployment had reached a record level: 27.2 percent. Then new economic data from London indicated that Britain had barely avoided slipping back into recession for the third time since 2008.
"The reality is that Europe still faces severe vulnerabilities that — if unaddressed — could degenerate into a stagnation scenario," David Lipton, first deputy managing director of the International Monetary Fund, said in London on Thursday.
If Germany slips into recession, much would slide down with it. Germany and the other 26 countries of the European Union together represent the world's second-largest economy and as a bloc it is the single largest United States trading partner. The further delay in Europe's recovery that a German recession would cause would seriously hamper growth in the United States, Asia and Latin America.
What growth remains in the region is coming mostly from countries in Eastern Europe. Poland is protected by its large domestic market and a healthy banking system. After a severe downturn that began in 2008, growth is rebounding in the Baltic nations of Estonia, Lithuania and Latvia. In that recession, wages fell, real estate prices dropped and banks worked through the painful process of improving their financial condition.
Unemployment there is by no means low, but those countries benefit by being the low-wage economies of Europe. They continue to attract investment of capital. It also helps that those economies, because they do not use the euro as their currency, can adjust their currency more easily to changing economic conditions in the rest of the world. Their economic planners have more policy tools than simply adjusting interest rates.
In Germany, there is little overt sign of crisis. Unemployment is 5.4 percent compared with an average of 10.9 percent in Europe. Nevertheless, polls show businesses are growing pessimistic. "The German market cannot decouple from this environment," Bodo K. Uebber, the Daimler chief financial officer, told analysts Wednesday.
The problem for the rest of Europe is that any hope for recovery is pinned on a robust German economy. Companies in Spain and Italy have depended on German demand to compensate for a collapse in consumer spending in their own countries.
"In my area there are some enterprises that work 100 percent to serve Germany," said Mario Moretti Polegato, the founder and chief executive of Geox, a shoemaker based in Montebelluna, Italy, near Venice.
Geox, known for shoes with waterproof but breathable soles, sells its products around the world and is not dependent on any one market. Still, Italy accounted for 35 percent of the company's total revenue last year, and those sales fell 15 percent as Italy remained stuck in a recession that began in mid-2011.
Geox sales in Germany helped to offset the decline, Mr. Polegato said by telephone. Germany is also a critical market for his family's wine business, which sells bubbly prosecco under the Villa Sandi and La Gioiosa brands. "The first market is Germany," Mr. Polegato said. That is true for most winemakers in the Veneto region, he said.
The worst case, said Mr. Weinberg, the economist, would be a depression caused by the failure of political leaders to fix the region's many weak banks and restore the flow of credit.
The worsening economic situation has raised hopes that the European Central Bank will come to the rescue, as it has so often since 2010 when the debt crisis began in the euro zone, the 17 countries in the European Union that use the euro. Somewhat perversely, the dismal economic news this week prompted a rally in stocks and bonds, as investors bet that the unexpectedly bad business surveys would prod the central bank to lower interest rates.
Economists now expect the bank to cut its benchmark rate to a record low of 0.5 percent from 0.75 percent when it meets on Thursday in Bratislava, the capital of Slovakia, another of the few euro zone countries still growing.
Many business people would welcome a cut because it would tend to lower the value of the euro compared with the dollar and other major currencies, and make it easier for European exporters to sell their comparatively cheaper products abroad.
"It would be a sign that policy makers understand it is time to find a way to compete," said Marco Tronchetti Provera, chief executive of the Italian tire maker Pirelli.
But it is unlikely that a rate cut would address a more fundamental problem in the euro zone: the lack of credit in countries that need it most.
Extraordinary measures by the central bank, including virtually unlimited loans to euro zone banks at the rock-bottom official interest rate, have not trickled down to help corporate borrowers in countries like Spain or Italy. The lack of credit is particularly vexing for the small and medium-size companies that are too small to raise money on the bond market and thus depend on banks.
Signs of a spreading recession are also strengthening the position of those people who argue that countries like Portugal, Spain and Greece should not be compelled to cut government spending so quickly. They say countries that have budget surpluses, like Germany, should increase spending to stimulate demand.
"The fiscal compact is going to kill Europe," said Mr. Provera of Pirelli, referring to the agreement among euro zone members to reduce deficit spending.
Mr. Provera reflects the growing sentiment among leaders like José Manuel Barroso, president of the European Commission, that policy should be more oriented toward growth and not just budget cutting.
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