Euro zone's political bumbling risks global gloom

Sun Nov 6, 2011 9:56am EST
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By Alan Wheatley

L'ISLE-SUR-LA-SORGUE, France (Reuters) - The euro zone's repeated failure to tackle its debt crisis is catapulting the bloc toward recession, raising the specter of dangerous spillovers to the rest of the world economy.

Whittling down the euro area's mountain of debt was always going to be a long slog, even without the unpredictable political dramas in Greece and Italy that overshadowed last week's summit of the Group of 20 major economies in Cannes on the French Riviera.

But the inability of euro zone leaders to convince their G20 counterparts that they were getting a grip on events has made the task that much harder. Confidence, already fragile, has frayed further.

"It's no wonder that people aren't spending when all you hear every day is about 'the crisis'," said Michel Quintao, co-owner of a wrought-iron workshop in this corner of southeast France, some 200 km (125 miles) from Cannes.

Even before the G20 meeting and an inconclusive pair of euro zone debt-crisis summits last month, the corrosive effect of flagging confidence was taking a toll on growth.

The euro zone's composite purchasing managers' index, a timely gauge of business sentiment, fell sharply in October to 46.5 from 49.1 in September, while German manufacturing orders slumped 4.3 percent in September.

Jim O'Neill, chairman of Goldman Sachs Asset Management, said the figures suggested the 17-member euro zone was already in, or close to, recession - explaining why the European Central Bank cut interest rates last Thursday, to the surprise of many investors.

O'Neill said the spread of economic weakness from the periphery to the core of the euro zone was in large part due to contagion via the financial markets, especially the relentless pressure on Italian bonds.   Continued...

<p>A huge Euro logo is pictured past the headquarters of the European Central Bank (ECB) in Frankfurt, September 29, 2011. REUTERS/Ralph Orlowski</p>