Two-speed Europe emerges from recession

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The eurozone yesterday revealed a more modest than expected 0.3 per cent expansion in activity in the last quarter of 2010, with more evidence of a two-speed Europe emerging from the recession.

As in previous releases, the pattern of growth varied greatly across the zone, from relatively robust performances in Austria and the Netherlands to falls in activity in Portugal, hardly any growth in Spain and Italy and a sharp slowdown in Greece.

The news came as European finance ministers met in Brussels to make further progress on the design and size of the eurozone's bailout facilities to deal with recurrent sovereign debt crises. A deal is likely to be finalised at next month's EU leaders' summit. Meanwhile, Portugal's government securities remain under especial pressure.

The exceptionally cold weather in December hit the German economy badly, though it still managed to grow by 0.4 per cent, against expectations of a 0.5 per cent rise and decelerating from 0.7 per cent in the third quarter. Recent data suggests that there has also been some restructuring in demand from exports of capital goods and towards domestic consumption.

France, too, suffered a disappointing showing – it grew by 0.3 per cent, half the forecast increase and the same level as in the July-September period, despite a rush to buy cars before a French scrappage subsidy scheme ended last year.

Of the other large economies, Italy grew by 0.1 per cent. Spain, which has been the periodic focus of market concern, grew by 0.2 per cent in the fourth quarter, having stagnated in the previous three months. By comparison, British GDP shrank by 0.5 per cent, and would have been flat without the effects of the snow.

But it is the poor growth data from Portugal and Greece that will concentrate the minds of European policy makers. Without growth , neither country seems likely to be able to honour its external obligations and the cost of servicing its debt, especially as the worldwide trend to higher interest rates may push that up in the coming months. In both these countries, as well as Ireland, the question is whether fiscal retrenchment will actually make the deficit worse and push them into a "death spiral" where the cost of servicing debt leads to ever more draconian budgets that slash economic growth even further.

Greece's recession continues, with contraction of 1.4 per cent from the previous quarter, against expectations of a 1.2 per cent decline. The central bank in Athens said the economy would shrink for a third successive year in 2011 with national income dropping at least 3 per cent. With national debt levels spiralling towards 140 per cent of GDP, speculation persists that Greece will be forced into a restructuring of its external debts, even with the assistance of a €110bn (£92bn) IMF/EU bailout behind it. Irish data is yet to be published.

Marie Diron, a senior economic adviser to the Ernst & Young Eurozone Forecast, said: "The main question for 2011 is the size of the impact of fiscal restraint, which we can only estimate.

"There is a risk that this is more negative than we, or the European Central Bank or governments, currently envisage. While we expect the eurozone economy to continue to grow this year, it is too early to be confident that the worst is behind us".