Europe's Struggle to Keep Growing—and Avoid Vicious Cycle

by Richard Barley

Wall Street Journal
November 7, 2011

Europe is at risk of a potentially devastating negative feedback loop. The economy is "practically in free fall," says Yves Mersch, a member of the European Central Bank's governing council. ECB President Mario Draghi has warned publicly of a recession. The latest economic data bear out their gloomy assessments. Failure to tackle the sovereign-debt crisis has fueled the downturn, but a new recession makes the crisis even harder to solve.

While investor attention has been focused on Athens and Cannes, the economic headlines have been disastrous. The euro-zone economy could shrink 0.4% in the fourth quarter, judging by the latest Markit euro-zone composite purchasing managers' index, reckons Barclays Capital. This closely watched index fell to 46.5 in October from 49.1 in September. Anything below 50 indicates an economic contraction. France, Spain and Italy are all contracting; Germany is just holding its head above water. But that may not last. New factory orders in Germany fell 4.3% on the month in September, with orders from the euro zone plummeting 12%.

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