The risk of recession in the euro zone is mounting, according to a closely watched business survey, signalling that a vicious cycle of fiscal austerity and economic contraction threatens even some of Europe’s biggest economies.
business activity in the euro zone is faltering, with France in particular entering a sharp slowdown.
The worsening outlook could force France’s government to make deeper budget cuts to protect its triple-A credit rating, further hurting its economy and adding to doubts about Europe’s ability to pay for bailouts of the euro’s weakest members.
The leaders are expected to sign off on a plan to recapitalize euro-zone banks, beef up the bloc’s bailout fund, and restructure Greece’s crushing debts.
Separately, euro-zone leaders are considering setting up a special purpose vehicle that would be used to attract public and private funds and would buy bonds and raise funds to recapitalize banks, a senior E.U. official familiar with the ongoing discussions said Monday.
With France starting to look like one of the euro bloc’s patients instead of the doctors, French President Nicolas Sarkozy may find his negotiating position weakened when he sits at the negotiating table in Brussels this week to hammer out a grand plan to save the euro zone. France has already given up on its demand to enlarge the euro-zone bailout fund with help from the ECB, amid German and ECB resistance.
"You can’t ask the others to clean their house if you haven’t put yours in order," noted Dominique Barbet, economist at BNP Paribas. If the French government cuts its growth forecast to 1% from 1.75%, it would need to find about another €8 billion in savings to meet its budget targets, BNP estimates.
Jean Pisani-Ferry, director of Brussels-based think tank Bruegel, said France should focus less on fiscal belt-tightening and more on jump-starting its economy, even if it means higher deficits in the near term. The worsening economic outlook "calls into question the short-term focus on fiscal policy and the wisdom of achieving fiscal targets at specific times," he said.Rapid growth early in the winter and early spring should propel Germany to a second-straight year of 3% growth. But analysts expect growth of only around 1% next year, enough to keep German unemployment low, but not enough to provide a boost for France and others.
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