Europe's economy recovers on stimulus

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(Agencies)
Updated: 2009-09-26 00:49

The 16 nations that use the euro fell into recession in the second quarter of 2008, the first since the currency was launched in 1999 and the worst for euro nations Germany and France since World War II.

Green shoots pushed through this summer as business and consumer confidence figures ended an eight-month slump in July with companies and shoppers more optimistic about the months ahead. Businesses said they expected orders to pick up as firms ended a spending freeze and started to restock.

But this has been slow to translate into a full-blown recovery as industrial output keeps shrinking - but at a lesser pace than earlier this year. Unemployment has hit a 10-year high - and is still rising.

EU officials and economists warn that the upswing is fragile. They predict that the euro zone and the EU could grow 0.2 percent in the third quarter compared to the three months previously and may only expand a moderate 0.1 percent in the final quarter of this year.

"Yes, we've probably taken ourselves out of recession," said Deutsche Bank's Moec. "The issue remains that it's quite fragile."

The recovery is also not completely uniform. Spain, once one of Europe's great economic success stories, remains mired in recession even as France and Germany start to recover from the economic downturn. Spain's prime minister warned earlier this month of a prolonged period of economic difficulty even after the country eventually recovers from its deep recession.

Moec said fiscal stimulus should be compounded in the coming quarters by a turnaround in inventories, but even so, "It doesn't really feel like you are in a recovery, but it doesn't feel like the complete collapse that we had in the winter."

Officials warn that governments should not end multibillion euro (dollar) stimulus programs that have boosted the economy at the expense of mounting public debt and deficits.

A bigger problem is a soaring jobless rate - 9.5 percent in the euro zone in July - that will increase before companies start hiring again in large numbers. The rate burdens governments with heavy social welfare payments, hurting public finances while tax revenues remain low.

Europe's less flexible labor market is one where employers are reluctant to hire or fire - meaning that many less-educated or older workers may be relying on the state for years to come, unable to find another full-time job.

Changing would mean dismantling a welfare system that trade unions and many political parties will fight hard to keep. Europe's aging population will weigh heavily on governments in decades to come as more inactive people depend on fewer younger workers to pay pensions and health care costs.

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