Euro Zone Austerity Takes Toll on Growth

The euro zone’s growth spurt lost momentum this month, as an expansion in output in Germany and France failed to make up for a near standstill elsewhere in the 16-country region.

Euro coins
Euro coins

A closely followed barometer of business activityon Monday pointed to a slower but still solid expansion in private sector activity, with the region’s prospects hanging largely on Germany and France, its two largest economies.

“Growth in the rest of the euro area slowed to near stagnation and services even contracted again as austerity measures bit,” said Chris Williamson, chief economist at Markit, which produces the survey.

The purchasing managers’ indices are regarded as an early indicator of business trends, and the latest readings contained some hope of growth continuing at a brisk pace, even if the US economy slows.

But they intensified worries that the region will be marred increasingly by weaker growth in the peripheral eurozone countries such as Spain and Greece, where fears remain over the stability of public finances.

“If the US is sort of treading water and surviving, as it seems to be doing now, then Europe can decouple,” said Marco Annunziata, chief economist at UniCredit. “The question is whether growth in Germany and France will be enough to pull the peripherals out of the slump . . . My hunch is that it is not and that we will see divergences widening.”

The European Central Bank reported on Monday it had stepped up purchases of euro zone government bonds last week. The €338 million ($426 million) it spent compared with just €10 million in the previous week. That revived speculation the ECB had intervened in Irish bond markets.

However, the total was still small compared with the €60.5 billion it has spent since the emergency program was launched at the height of the euro zone debt crisis in May.

The composite eurozone purchasing managers’ index, covering manufacturing and services, fell from 56.7 in July to 56.1 in August, a two-month low. Markit said August’s figure was consistent with gross domestic product expanding at a quarterly rate of 0.7 percent.

Excluding Germany and France, the indices showed growth was extremely modest in August and weaker than in July. Germany’s composite index rose to a four-month high of 59.3, up from 59.0 in July, a result of a rapid pick-up in the service sector. In contrast, France’s composite index dipped from 59.7 in July to 59.0 in August, the lowest for five months. But Markit argued that the survey still pointed to a robust recovery continuing.