Europe Looks No Longer Immune to U.S. Economic Storm

(International Herald Tribune – Mark Landler)

Europe, which held the world’s economic storms at bay for the last year, has finally succumbed.

Spain, Ireland and Denmark are either in, or on the brink, of a recession. Italy is stagnating. France is weakening fast. And Germany, the sturdy locomotive of European growth, is suddenly faltering – dashing most residual hopes that Europe could escape the upheaval in the United States.

On Tuesday, an influential poll of German investors by the Center for European Economic Research in Mannheim found that confidence has plummeted to its lowest level since the survey was started in 1991.

Shares in Spain swooned after that country’s housing crisis claimed its first big casualty: a property developer that filed for protection from creditors. And in Britain, the inflation rate surged – as it has elsewhere in Europe – to 3.8% because of soaring prices for food and fuel.

“We’ve seen a sea change in Europe,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “All the bad news around the world has finally come to us.”

While most economists had predicted that Europe would suffer fallout from the financial market chaos and the broader American malaise, the speed of the deterioration has surprised the soothsayers.

As recently as June, Mayer noted, the European Central Bank was projecting only a modest dip in growth in the second quarter. Two weeks ago, it raised interest rates, citing the risk of inflation. Now the risk is that Europe could face a shrinking economy this summer.

In that sense, Europe finds itself on a precipice similar to that in the United States, which is already in or verging on a serious slump. But given the historic resilience of the U.S. economy, some economists give the Americans slightly better odds of avoiding a classically defined recession – in which economic growth shrinks for two quarters in a row – than the Europeans.

“It is not impossible that the euro zone will dip into recession while the U.S. manages to skirt it,” said Holger Schmieding, the chief European economist at Bank of America in London.

Such a statement would have been far-fetched four months ago, when investor confidence and industrial output was rising in Germany and France, despite a buoyant currency that makes European exports more expensive in the United States and other dollar-linked markets.

One dynamic that has not changed since then is the euro, which hit a new record high against the dollar Tuesday.

The tense mood in the United States is pushing investors to sell dollars and seek refuge in the euro. For all the storm clouds here, Europe still looks like a safe harbor next to the United States, where fears about the solvency of Fannie Mae and Freddie Mac have rattled the broader market.

Still, the strong euro – combined with high oil prices – is finally exacting a toll on Europe’s export machine.

German exports slumped 3.2% in May from the previous month, the largest monthly decline since June 2004. The country’s once-robust trade surplus shrank to €14.4 billion, or $23 billion, from €18.8 billion, according to government statistics. Click here for the complete article.