Business, consumer views darken in Europe

By David Mchugh

Associated Press

Published: Tuesday, Aug. 30 2011 7:20 a.m. MDT

Luxembourg's Prime Minister and head of the eurogroup Jean-Claude Juncker, left, and European Commissioner for Monetary Affairs Olli Rehn prepare for the start of a session at European Parliament in Brussels on Monday, Aug. 29, 2011. The head of the European Central Bank and other key eurozone officials are set to debate the latest hitches in the currency union's debt crisis with European lawmakers.

Virginia Mayo, Associated Press

Enlarge photo»

FRANKFURT, Germany — Business and consumer sentiment in the 17 countries that use the euro fell in August, reinforcing fears that the region's economy will slow in the months ahead as political leaders struggle to contain a crisis over government debt.

The European Union's economic sentiment index issued Tuesday fell 4.7 points to 98.3 — the sixth consecutive decline, bringing the indicator below its long-term average of 100.

Germany, the eurozone's biggest economy, reported the largest drop, and it alone remains above the 1990-2011 average. The Netherlands and Austria, two other countries that have not been drawn into the debt crisis, also saw a significant fall.

The reasons for the decline included gloomier views of the future among retailers, and among consumers afraid of losing their jobs, EU economic officials said in a statement accompanying the index numbers.

Additionally, industrial managers are concerned about weaker future export orders and inventories that may be overstocked for upcoming demand.

Economists and government officials say the economy is starting to be affected by financial market ups and downs caused by fears that some governments may not be able to repay their debts. Stock and bond markets fell sharply in early August amid fears that efforts by eurozone government leaders would not be enough to keep the crisis from spreading to Italy and Spain. Greece, Ireland and Portugal have already taken bailout loans from other eurozone governments and the International Monetary Fund to avoid default, but Italy in particular is considered too big to rescue.

European Monetary Affairs Commissioner Olli Rehn told EU lawmakers on Monday that the market volatility was now affecting the real economy.

The European Central Bank has fought the market turmoil for three weeks by buying Italian and Spanish government bonds to reduce financial pressure on those countries, but governments are still struggling to reduce debt and find a more permanent solution. Leaders agreed July 21 to give new powers to the eurozone's €440 billion ($637 billion) bailout fund, enabling it to take over the bond purchases from the ECB and loan money quickly to troubled governments, but national parliaments have not yet ratified those changes.

Economist Christopher Weil at Commerzbank predicted the eurozone would slow but not fall into recession — unless the debt crisis unleashes a shock to the financial system like the one after the bankruptcy of U.S. investment bank Lehman Brothers in 2008.

Even if there's no recession, weaker growth will make the debt crisis harder to deal with, he said.

"The downturn in countries with a strong credit standing could exacerbate the debt crisis; their possibilities and presumably also readiness to help the crisis-stricken countries fall accordingly," Weil wrote in a research note to investors.

The EU forecasts 1.6 percent growth this year for the eurozone, but those predictions are due to be lowered on Sept. 15. Easing growth in Germany has been a key reason; gross domestic product grew by a scant 0.1 percent in the second quarter.

The European Central Bank has indicated it is reassessing its inflation outlook, a sign that its key interest rate may be on prolonged hold at 1.5 percent after quarter point increases in April and July.

The EU sentiment index fell further, to 97.3, for the entire 27-member European Union, which includes countries that do not use the euro. Britain showed a sharp drop of 5.6 points because sentiment was down sharply in the services sector.

The economic index combines indicators for business and consumers: 40 percent industrial confidence, 30 percent services, 20 percent consumers, 5 percent construction and 5 percent retail.

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