North and south split as euro zone economy shrinks

Wed Feb 15, 2012 7:47am EST
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By Robin Emmott and Daniel Flynn

BRUSSELS/PARIS (Reuters) - The euro zone economy shrank at the end of 2011 and will flirt with a mild recession under the weight of the sovereign debt crisis, but strength in France and resilience in Germany may keep it above water.

The drag is coming from a stricken, debt-laden south, epitomized by a slumping Italy.

Economic output in the 17-nation currency area fell 0.3 percent in the fourth quarter from the third, as expected by economists in a Reuters poll, the European Union's statistics office Eurostat said on Wednesday.

The slump was the first contraction since the second quarter of 2009 at the height of the global financial crisis, when output shrunk 0.2 percent. The 27-nation EU economy also shrunk 0.3 percent in the October-to-December period.

But economic progress was very diversified.

"We seeing very wide regional divergences and this fourth quarter data doesn't really help us see where the economy is going," said Greg Fuzesi, a European economist at JP Morgan. "The fundamentals make you think the economy will stay in recession but business surveys suggest otherwise," he added.

Underscoring just how poisonous the debt crisis has been for businesses and the economy, gross domestic product grew just 0.7 percent in the fourth quarter compared to a year earlier after posting 2.4 percent growth at the start of 2011, when Europe was recovering strongly from the 2008/2009 global financial crisis.

Despite signs of stabilization in January, helped by calmer capital markets and stronger growth in the United States, analysts in a Reuters poll predict the euro zone's economy will still shrink 0.4 percent throughout 2012, returning to growth in 2013.   Continued...

Man walk pasts a closed shop on Lisbon downtown February 14, 2012.   REUTERS/Jose Manuel Ribeiro