Britain the economic 'sick man of Europe'

Eurozone out of recession, led by Germany, but growth is below expectations

After decades of outperforming the continental economies, Britain seems set to become the "sick man of Europe", languishing at the bottom of the European growth league table.

Official figures released by Eurostat yesterday revealed that the eurozone economies, comprising 16 of the EU's 27 member states, are now officially out of recession, having grown by 0.4 per cent in the third quarter. The growth rate for the EU as a whole, dragged down by the UK and some east European states, was 0.2 per cent. Both are the first positive news on growth since spring last year, though they are somewhat below market expectations.

Of the five largest European economies, only Britain and Spain are still in recession, and even the stricken Spanish economy is performing marginally better than the UK. The US and Japan are also out of recession.

Meanwhile, the German economy has staged a remarkable comeback from the depths it suffered as world trade and her manufactured exports fell off a cliff earlier in the year. Now Europe's largest economy is pulling the rest of the continent into an upswing, as exports revive and German industry begins to rebuild stocks and investment. Exceptional fiscal stimulus measures, such as a generous car scrappage scheme and job subsidies, seem also to have succeeded.

A spokesperson for Joaquí*Almunia, the European commissioner for economic affairs, said the figures were "broadly in line" with Commission forecasts and that the Commission expected growth to stay positive to 2011.

While growth in the UK's major trading partners is good news, the danger now is that the Berlin government and the European Central Bank take the latest figures as justification for a withdrawal of monetary and fiscal stimulus measures before growth in laggard nations such as the UK has even begun. The G20 Communiqué agreed that such "exit strategies" should not be implemented before the global recovery had been "secured".

With a 0.7 per cent rise in quarterly GDP, Germany is the major driver of European growth, contributing nearly half of the total GDP growth in the single currency zone in Q3. Italy saw a sharp reversal in fortunes for the better, with 0.6 per cent growth, and France, which suffered a mild recession by most standards, is up 0.3 per cent. Robust expansions were also registered in the Netherlands (0.4 per cent and Portugal (0.9 per cent).

By contrast, the downturns in Spain and Greece dragged on, with GDP falling in each by 0.3 per cent quarter on quarter. Spanish unemployment is especially severe, at almost one on five of the workforce. The collapse of the property boom has apparently poleaxed the nation's economy, though her banking system is relatively healthy.

Vince Cable, the Liberal Democrats' Treasury spokesman, said: "There is now a real danger that the heart attack the British economy suffered has made us the sick man of Europe.

"The growth in the eurozone is due in good part to a successful fiscal stimulus. Had the UK concentrated on building up infrastructure and jobs rather than wasting money on the VAT cut, then we would be in a much stronger position."

The shadow Chancellor, George Osborne, added: "Far from 'leading the world out of recession' as Gordon Brown has claimed, the evidence shows how his economic policies have failed."

Nick Kounis, economist at Fortis Bank, said: "The message is that the recovery has begun, but the upswing will be a moderate and gradual affair as domestic demand will remain lacklustre. In such a scenario, the ECB does not need to rush towards the exit."

The data shows a wide disparity in economic performance across the European Union. Hungary remains the worst performer in the Union, with output slumping by 1.8 per cent between June and September. But the neighbouring Czech Republic is the star performer among EU nations reporting figures so far – output is up 0.8 per cent last quarter.