The euro-zone economy plunged last quarter at its fastest pace in nearly four
years, as weakening global activity and deep recessions along the currency
zone's southern border gripped powerhouses such as Germany and France.
The report on gross domestic product from the European Union's statistics
office highlights a key risk for the currency bloc as Europe's debt crisis
enters its fourth year. Financial market conditions have improved markedly since
last summer, due in large part to the European Central Bank's pledge to do
"whatever it takes" to preserve the euro. But these gains haven't translated
into new business activity.Without growing economies, Spain and Italy will
likely see government-debt burdens increase even as they undertake austerity
measures such as higher taxes and reduced spending. That could revive doubts in
financial markets about the sustainability of their finances. GDP in the euro zone fell 0.6% in the fourth quarter compared with the third,
according to the Eurostat report. Economists had expected a 0.4% drop. It was
the third straight GDP decline and fifth straight quarter in which the currency
bloc failed to expand. For 2012 as a whole, GDP fell 0.5% from the prior year.
GDP in Germany, Europe's largest economy, fell 0.6% from the previous quarter
on declining exports and investment. France, the bloc's second biggest, declined
0.3%. Other large economies including Italy, Spain and the Netherlands
contracted.
Italy's GDP plummeted 0.9% from the previous quarter, a much sharper rate of
decline than the third quarter. Spain's downturn also deepened. Portugal's GDP
slid 1.8% in the final three months of 2012, double the third quarter's rate of
decline.
ECB officials expect the euro zone to embark on a gradual recovery later in
2013. But the source of that rebound remains elusive. Record-high unemployment
in the euro zone has weighed on consumer spending, while fiscal austerity
measures are expected to weaken state spending and employment in many euro
countries this year. Borrowing costs for small businesses remain elevated in
Spain and Italy. In Germany, where unemployment is much lower than other parts of the region,
the economy appears to be bouncing back quickly with business surveys signaling
a return to growth this quarter, aided in part by stronger exports to Asia.
Weakness in late 2012 "is likely to be a springboard for a small V-shaped
rebound" as soon as this quarter, said Berenberg Bank economist Christian
Schulz.
But surveys of purchasing managers and other business leaders suggest France
continues to contract this quarter. French industry has lost global
competitiveness in recent years as its labor costs rose, economists say. A raft
of tax increases imposed by President François Hollande is adding to the
headwinds facing the economy.
The French government is preparing to at least halve its 0.8% GDP growth
forecast for this year, officials familiar with the matter told The Wall Street
Journal earlier this month. The smaller size of the economy and fall in tax
receipts is also derailing government plans to cut the budget deficit to 3% of
GDP this year.
"In order to maintain its position at the epicenter of the euro area in
economic terms, France has a lot of work to do," said analysts at J.P. Morgan JPM -0.94%in a research note.
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Japan will switch off its last nuclear reactor on Monday, amid fears that a growing dependence on gas imports there could push up electricity bills in the UK.
Kansai Electric Power's only functioning reactor was scheduled to be disconnected from the power grid and then shut for planned maintenance, ending hopes that an industry that until three years ago provided 30% of the electricity to power the world's third largest economy would stage a quick recovery.
Continuing problems at the Fukushima plant, where radioactive water has continued to spill into the sea, and a reluctance by voters to back what looks like a badly managed industry, have led to more than 50 nuclear plants being closed, sending Japanese imports of liquefied natural gas (LNG) back to levels last seen after the 2011 tsunami.
Energy analysts said that Japan's shutdown, combined with Germany's commitment to end nuclear power production by 2022, was pushing up gas prices on the international markets.
Rising demand for gas combined with the cost of subsidies for renewable energy, much of which is added to household and business bills, is expected to push up energy prices in the west.
According to the CBI, there is a growing unease among UK businesses that energy costs look likely to rise.
A survey and report published by the business lobby group the CBI found that around 95% of British business leaders are worried about the cost of energy and that more than three-quarters of them have little faith that matters will improve in the next five years.
Mr Summers, a former US Treasury Secretary and policy adviser to Barack Obama, on Sunday phoned the US President to notify him that he no longer wanted to be considered for the most powerful role in central banking.
His shock withdrawal appears to place Janet Yellen, Mr Bernanke’s second-in-command, in pole position to win the President’s nomination. Ms Yellen would be the first female leader of the Fed in its 100-year history.
In a letter sent to Mr Obama yesterday, Mr Summers said: “I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the administration or, ultimately, the interests of the nation’s ongoing economic recovery.”
Although the White House was believed to have favoured his appointment, several Democratic senators opposed nominating Mr Summers due to his history of financial de-regulation.
During his time at the Treasury, Mr Summers repealed parts of the 1933 Glass-Steagall Act, which separated retail and investment banking. The move is criticised by Mr Summers’ opponents as one of the key factors that led to the financial crisis.
CSU leader and Bavarian Prime Minister Horst Seehofer told elated supporters that his party's performance was a "great success".
"The CSU is a people's party and we are deeply rooted in the Bavarian population. Every second Bavarian voted for us," he said.
Correspondents say that the CSU's strong performance fulfilled a pledge made by Mr Seehofer to Mrs Merkel that his party would set an upbeat tone for the national poll on 22 September.
However the results were a setback for the pro-business Free Democrats (FDP), with whom Mrs Merkel governs Germany in a centre-right coalition.
It slumped to just 3% of the vote, below the 5% level needed for assembly seats.
"This is a heavy defeat... But our response now is: let's get going... Bavaria is different. Now it is about Germany," said FDP leader Philipp Roesler, who described the results as a "wake-up call".
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