The European debt problems that have roiled global financial markets for the last 18 months are showing signs of turning into a far deeper challenge: Europe’s second recession in three years.
Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as high unemployment and austerity belt-tightening take their toll. But in the last few weeks, even prosperous Germany and France, the Continent’s powerhouses, have started to be dragged down, hurt by the ebbing of business orders from indebted countries in the rest of Europe.
European stocks continued their latest plunge on Tuesday, as the German financial giant Deutsche Bank, buffeted by the debt crisis, reduced its profit forecast for the year. Investors were also jolted by news that the French-Belgian investment bank Dexia might be the region’s first large bank to need a government rescue as a result of the current debt crisis.
It is not just the Continent’s problem.
The United States, a major banking and trading partner with Europe, is stuck in its own rut — prompting the Federal Reserve chairman, Ben S. Bernanke, to warn Tuesday that “the recovery is close to faltering.” He told a Congressional panel that the economy could fall into a new recession unless the government took further action.
United States stocks ended up for the day, but had bounced wildly on jitters about Europe and rising fears that Greece would have to default on its sovereign — or government — debt. The Greek finance minister said Tuesday that the country could continue to pay its bills at least through mid-November, after other European finance ministers said Greece would not receive its next installment of bailout money before next month, if then.
A downturn in Europe, if it happens, could help tip America back into recession and would undoubtedly ricochet around the world. Europe’s banks are among the most interconnected in the world, and the euro is the world’s second-largest reserve currency after the dollar.
The 17 European Union nations that share the euro together account for about one-fifth of global output. And emerging markets that are important customers for European exports, like China and Brazil, are beginning to retrench.
“We are the epicenter of this global crisis,” Jean-Claude Trichet, the president of the European Central Bank, said on Tuesday at the European Parliament.
A growing chorus of analysts now predict that Europe is heading for an outright recession. “The sovereign debt crisis is like a fungus on the economy,” said Jörg Krämer, the chief economist at Commerzbank. “I thought it would be just a slowdown,” he said. “But I have changed my mind.”
Already, the euro zone economy has slowed to essentially zero growth. It could stay in a slump, many economists say, at least through next spring. If that happens, tax revenue is likely to fall and unemployment, already high, is expected to rise, making it even more difficult for Europe to address the sovereign debt crisis and protect its shaky banks.
In a sign of how quickly the ground is shifting, the European Central Bank might lower interest rates on Thursday — just a few months after it started raising them in what is now seen as a misguided effort to stem incipient inflation.
Distress is increasingly evident across Europe.
In Italy, which has the euro zone’s third-largest economy, after those of Germany and France, a 45 billion euro austerity program aimed at reducing debt has many worried about a recession. On Tuesday, the ratings agency Moody’s downgraded Italian government bonds by three notches, to A2 from Aa2, and kept a negative outlook on the rating.
At the start of the year, Mr. Bastianello was more optimistic that Europe would escape its troubles and that the government might seriously tackle Italy’s problems. “But the turbulence of the markets and the uncertainty about this abnormal mass of public debt just scare people away from buying,” he said.
The worldwide dimension of the financial crisis, Mr. Figueiredo added, made the outcome even more uncertain. “We’re now in the middle of a crisis that started in American real estate and then crossed over to Europe, and it seems really nobody has any idea where this will go next and for how long.”
After growth in Portugal, Greece, Spain, and Italy started to trail off last year, he shifted his focus to Germany. Mr. Libner figures it will take at least a decade for any real growth to return to Southern Europe, particularly in Spain and Greece, which he classifies as “a catastrophe.”
Mr. Libner said he hoped Paris’s efforts to bring the country’s deficit and overall debt into line with European rules would allow France to keep its AAA bond rating — provided that European leaders figure out how to contain the debt crisis to Greece. If that happens, he said, Europe could rebound quickly, as investors regain faith in the viability of the euro union.
But if it does not happen, and Europe’s banks become further ensnared in the crisis — he shuddered at the thought. “We can pay for Greece, but not for all of Europe,” he said. If the crisis swells, he added, “we won’t have the means to pay for all of this.”
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