by Richard Barley
Wall Street Journal
July 23, 2011
Debt crisis, meet growth crisis. While European politicians have been arguing over a solution to Greece's debt problems, an even bigger challenge has emerged that threatens to further destabilize the euro zone: slow growth.
The euro-zone economy is now flat-lining at best, judging by the advance euro-zone Markit Purchasing Managers Index for July. It came in way below the consensus forecast at 50.8, the lowest level since August 2009 and close to the 50 mark that divides expansion from contraction. Both manufacturing and services activity slowed. Germany and France are expanding at the slowest pace in two years and the rest of the euro zone is contracting already, Markit says.
Earlier expectations of a second-half pickup are now doubtful. The spread of the sovereign crisis to Spain and Italy means it now affects countries making up 35% of euro-zone gross domestic product, versus the 5%-6% accounted for by Greece, Ireland and Portugal. Higher bank funding costs in these countries will force the pace of deleveraging. Ratings agencies are already concerned about growth in Spain and Italy.
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