For the past few weeks the question has been whether Germany will rescue Greece and the other floundering eurozone economies from their own excesses. The point at issue now may be more whether Germany will even be able to afford such an exercise.
Europe's largest economy seems to be heading for a "double dip" recession – raising fresh doubts about Berlin's ability to finance any possible rescues for the so-called PIIGS – Portugal, Ireland, Italy, Greece and Spain – the eurozone states with the weakest public finances.
Such a downturn and draining of confidence in the continental economies would inevitably bear down on the UK, out of the euro but also itself barely out of recession last quarter with a minimal 0.1 per cent growth. Events in Britain's largest economic partner will have a crucial bearing on trade, investment flows and jobs.
Eurostat said yesterday that growth across the eurozone was just 0.1 per cent during the last three months of 2009, compared with an expansion of 0.4 per cent between July and September.
The Germany economy registered nil growth. Having experienced a sharp downturn and loss of output of about 7 per cent during the recession, Germany had bounced back strongly in the second and third quarters of last year, buoyed by the recovery in world trade and further boosted by generous car scrappage schemes around the world.
Ominously, that spurt of growth seems to have petered out, with the expiry of special measures such as those scrappage schemes, and the gradual reversal of monetary and fiscal boosts across the world. As one of the great trading nations and manufacturers, Germany is particularly sensitive to such trends. Job subsidies have so far helped to protect the labour market from more serious damage, but the programme of fiscal retrenchment being undertaken by Chancellor Angela Merkel's Christian Democrat/Free Democrat alliance may bring those to an end as well.
Official first estimates indicated that the Italian economy, previously recovering, suffered a relapse to shrinkage of 0.2 per cent.
Spain and Greece remained in recession, with the Greek economy contracting by 0.8 per cent. Such downward pressure on personal incomes and corporate profits suggest George Papandreou's austerity programme will be even harder to implement than previously assumed.
The Greek Prime Minister even resorted to mythology during his latest discussion with the cabinet. He told ministers yesterday that Greece is on an "odyssey" to tackle the EU's largest budget deficit and must "reach Ithaca", referring to the poem by Homer. While a "Cyclops" or other "monsters" may attempt to hinder Greece's plan, "we will make it," Mr Papandreou added. The problem is that the markets think his policies are mythological too, and doubts about the Greeks may still spread to Spain, Ireland and Portugal – the so-called "contagion".
The underlying problem is that there are, behind the brave shows of unity, deep divisions in the eurozone over what to do. For Paris, the euro is of such paramount importance that any bill would be worth paying to keep it intact. In Berlin the political opposition to a bailout for Greece, and others, is severe, within the Merkel government and outside. And even the German economy might not be able to cope with all these rescues at once. While Greece is small – about 3 per cent of European GDP – Italy and Spain are not.
All of which leaves confidence in the eurozone area fragile. Yesterday CDS rates on Greek government debt (the cost of insuring it against default) rose again, having eased on Thursday following the EU leaders' summit that pledged that euro member states would "take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole".
Beyond putting Greece "on report" – requiring Mr Papandreou to account for himself every month – and placing the IMF in a supervisory role in the Greek Treasury, there was little extra support for the Greeks, and no new money.
The eurozone is in a terrible bind: if growth stumbles then it will make the problem of financing the PIIGS' budget deficits that much worse as the deficits will balloon even more. But it will also leave the German government with an equal problem of finDing the resources to aid them from its own stagnant economy.
At the moment the best hope would seem to lie in France's gravity-defying trend of stronger growth. President Nicolas Sarkozy might enjoy the title of "saviour of Europe", but can Sarko afford it?Reuse content