Eurozone recovery grinds to halt amid Ukraine fear
By DAVID McHUGH
the associated press | August 15,2014
A worker fixes a net on a scaffolding at a construction site in front of the Reichstag building in Berlin, Germany, Thursday. The shaky economic recovery in the 18-country eurozone ground to a halt in the second quarter amid fears over the crisis in Ukraine and softer trade and investment.
FRANKFURT, Germany — Well, that didn’t last long.
After four quarters of meager growth, the fragile economic recovery in the 18-country eurozone creaked to a halt in the second quarter.
Growth was zero. After only 0.2 percent in the first quarter.
Now who will get out and push? The European Central Bank, with a further monetary stimulus? Or governments in France and Italy, which have dragged their heels in making their economies more business-friendly?
Either or both could help. Especially if the Ukraine crisis mushrooms with a Russian invasion that would scare off business investment even more — and extend one bad quarter into an outright recession.
Few economists think the eurozone will slip back into its third recession in six years. Most expect only a slow recovery as Europe continues to work down its debts.
“It’s still going to be a slow recovery for the eurozone and it will be a slow recovery for eurozone markets for imports from the rest of the word,” said Tom Rogers, senior economic adviser to the EY eurozone forecast.
Here’s what happened:
SILENT SPRING: Germany let everyone down by shrinking 0.2 percent in the second quarter from the previous three-month period. Economists aren’t too concerned because they think a lot of the growth simply migrated to the first quarter because of a very warm winter that let construction start early. Europe’s biggest economy remains the continent’s standout performer. It has low unemployment and took steps to cut business taxes and costs years ago.
RUMORS OF WAR: The “Putin effect,” as economists at Berenberg Bank call it, comes from fears that Russian President Vladimir Putin may back an invasion of eastern Ukraine where pro-Russian separatists are fighting Ukrainian government forces. That worry is making businesses hesitant to invest. Though eurozone exports to Russia are only 0.8 percent of the bloc’s annual gross domestic product, the crisis has hurt business confidence — executives are wary of risking cash for expansion, just as they were getting their mojo back after the debt crisis of the past few years. Business surveys like Germany’s Ifo show the fear is taking hold.
Ukraine fears have only grown since the end of the quarter on June 30. Since then, the shooting down of Malaysia Airlines Flight 17 over Ukraine on July 17 — by a missile from territory held by pro-Russian separatists, according to the U.S. and Ukraine — has increased tensions dramatically.
THE USUAL SUSPECTS: Stagnating France and Italy are balking at politically tough reforms that would lower costs for businesses. France’s economy was flat in the second quarter. Italy’s shrank 0.2 percent, for the 11th drop in the past 12 quarters. So-called structural reforms include easing rigid rules on hiring and firing, and especially in Italy’s case, reducing choking bureaucracy and corruption. France has tried cutting payroll taxes to help business but further steps have stalled. Italy’s Prime Minister Matteo Renzi came into office six months ago promising fast change, but now says reforms will be rolled out over the next 1,000 days.