Euro Area Could Fall Into a Sharp Recession

Until very recently no one would expect the Euro Area economy to fall in recession. But as the United States financial market crisis spills over into the global economy there is no chance for Europe to stay afloat while the world is sinking.

Indeed, as a result of tensions among U.S. lawmakers over the financial rescue plan for the U.S. and international banks, financial conditions in the Euro Area have tightened significantly. European banks' unwillingness to lend to each other can be seen in the three-month euro Libor rate which reached 5.27 per cent during this week, the highest level since the credit crisis began.  Looking further ahead, there is a big danger that the surge in borrowing rates could bring further deterioration to household borrowing, consumer spending and corporate investment.

In addition, the last few days have produced a series of depressing business surveys. Over the past 15 months both consumer and business confidence have been declining sharply. In fact, a survey of European companies and consumers showed the index of confidence in the economy falling to 87.7 in September, from 88.5 in August, the lowest since the Sept. 11 terrorist attacks. Also, it is expected that a purchasing managers survey's for the manufacturing and service sector, due this week, will show how falling confidence is influencing orders and employment expectations.

The only good news for Euro Area may be the decline in inflation caused by the recent fall in oil and commodity prices. But it is doubtful that the fall in the consumer prices will be enough for the European Central Bank to cut interest rates this year.

Euro Area Could Fall Into a Sharp Recession

Anna Fedec,
9/30/2008 2:19:01 PM