Economy in Europe Contracts More Than Expected

European economies shrank in the fourth quarter at their fastest rate since the depth of the financial crisis in 2009, new data showed on Thursday, with both strong and weak countries falling short of expectations and raising anxieties of a longer, deeper recession.

Germany and France are now caught up in a slump that was already well under way in other big euro zone economies like Spain and Italy.

The figures were a reminder of how hard it has become for many of the world’s most economically developed countries to overcome their debt problems and return to growth. Even the United States, which had appeared to be rebounding, surprised economists late last month by reporting contraction for the fourth quarter.

In the euro zone, economic output shrank 0.6 percent from October through December, compared with the previous quarter, according to official figures published on Thursday. That came after a decline of 0.1 percent in the third quarter.

While economists had expected a decline in the fourth quarter, they did not expect it to be quite so big. The disappointing data called into question the timing of a recovery that was supposed to begin later this year. And the figures put pressure on government budgets that are already stretched because tax revenue automatically falls when companies and workers are earning less.

Almost every one of the euro zone’s 17 members suffered a drop in gross domestic product. In the three biggest euro economies, G.D.P. fell 0.6 percent in Germany, 0.3 percent in France and 0.9 percent in Italy.

For France, especially, Thursday’s data was a deep embarrassment to the government. The Socialist president, François Hollande, was elected last May after pledging to reduce the budget deficit this year to 3 percent of G.D.P., as required under euro zone rules. And his finance minister, Pierre Moscovici, had promised numerous times since then that the government would meet the 3 percent limit this year. But the lack of growth will make it all but impossible to meet that goal.

The gloomy economic data could also influence the outcome of elections later this month in Italy, in which the country’s international credibility is at stake. The prolonged slump provides ammunition to populist forces led by former Prime Minister Silvio Berlusconi, perhaps giving his party enough seats in Parliament to block unpopular measures intended to improve the country’s economic performance.

The economic report by Eurostat, the European Union’s statistics agency, was not bad enough to kill all hope that the euro zone was on the mend and that it could see weak growth later in the year.

Industrial production for the bloc rose in December, and surveys have suggested that businesses and consumers were becoming more willing to spend because they were less afraid that the euro zone would break up under the stress of debt and banking crises.

“I think the euro zone looks a lot more stable,” said Marie Diron, an economist in London who advises the consulting firm Ernst & Young. “There are surely companies in Germany and Finland which couldn’t really take the investment and equipment decisions they wanted to,” because of fears of a breakup. “Now that has disappeared.”

But Ms. Diron noted that unemployment remained high in many countries, creating political instability that was amplified by governments’ need to cut spending. “That’s really where the risk remains,” she said.

The deepest misery is still in Greece, even if fewer people are predicting that the country will have to leave the euro zone. Unemployment rose to a record 27 percent in November, the Greek Statistics Agency said on Thursday. Nearly two-thirds of young people are jobless.

The French economy has been suffering from a drop in industrial production, as large employers like the carmaker PSA Peugeot Citroën struggle to cope with plunging demand in their most important markets, including Spain, where growth last quarter fell 0.7 percent.

This week, the French government auditors, the Cour des Comptes, announced that French growth would be significantly below the 0.8 percent previously estimated by the Hollande government, making it practically impossible to keep the deficit below the goal of 3 percent of G.D.P. despite significant tax increases. The Thursday figures, showing a contraction of 0.3 percent in the fourth quarter and no growth at all in 2012, were even worse than expected.

The auditors recommended balancing the tax increases with more cuts in public spending, but the Hollande government has said that it wants to impose taxes up front and deal with more significant spending cuts in coming years. Some economists contend that France is taxing itself into a recession.

Mr. Hollande, who has argued for measures to promote economic growth as unemployment rises, acknowledged failure, telling reporters earlier this week, “There is no point sticking to objectives if they are not going to be achieved.”

Mr. Moscovici said after a cabinet meeting on Wednesday that the government did not want “to add austerity on top of austerity, either for France or for Europe.”

Among all 27 members of the European Union, including countries like Britain and the Czech Republic that are not part of the euro currency union, economic output fell 0.5 percent.

In Germany, the unexpectedly large decline in output was caused by lower exports and fewer purchases of equipment by companies.

During the first nine months of last year, Germany continued to defy the recession in the euro zone as a whole, benefiting from sales to countries outside the euro zone, especially the United States and China. But the decline in the fourth quarter illustrated Germany’s vulnerability to the fortunes of its neighbors.

In coming weeks, economists will be watching for evidence that the German economy has already begun growing again, as many predict. If so, that could help pull the rest of Europe out of recession.

“While we expect a stabilization in the first quarter and a weak recovery from the second quarter onwards,” Peter Vanden Houte, an economist at ING Bank, said in a note to clients, “one has to acknowledge that a lot of things still can go wrong.”
NYT