Germany, France prop up growth as eurozone crisis widens

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Berlin and Paris propped up the crippled eurozone with resilient growth figures Tuesday but France was buckling on the bond market where tension was acute amid government rebuilds in Italy and Greece.

In Rome, new Prime Minister Mario Monto won vital support from two key parties, despite warning that the nation faces "sacrifices" under a relaunch of deep reforms.

But Italian borrowing rates shot up along with French and Spanish rates which surged to show a record gap with the eurozone benchmark 10-year borrowing rate for Germany.

France, with a 10-year rate of 3.500 percent, now has to pay about twice as much as Germany to borrow, even though both have the top AAA credit rating which France is fighting desperately to retain.

If the French borrowing rates and credit rating deteriorate, the architecture of the key European Union EFSF rescue fund could be compromised.

But while Germany and France clocked up growth of 0.5 percent and 0.4 percent respectively, analysts and think-tanks say that will be the last of the good news for the eurozone for quite some time.

And in Greece, where a new goverment is also trying to relaunch reforms to avert bankruptcy, new data showed the economy shrank by 5.2 percent in the third quarter highlighting the huge task facing Prime Minister Lucas Papademos.

The eurozone showed quarterly growth of 0.2 percent thanks largely to a pick-up in consumer spending in Germany, the Eurostat data agency said.

They said the 17-nation single currency area could already be slipping into recession, noting that the stiff austerity aimed at tackling debt crisis problems in many countries -- Italy, Spain after Greece, Ireland and Portugal and perhaps now even France -- are undercutting growth.

The fractional 0.2-percent eurozone growth in the third quarter "may well be as good as it gets in the near-term at least, as contraction looks highly possible in the fourth quarter and we suspect also the first quarter of 2012," said London-based IHS Global Insight analyst Howard Archer.

Indeed, "we expect to see GDP contract by around 0.25 percent quarter-on-quarter in both the fourth quarter of 2011 and the first quarter of 2012," he said.

He tipped gross domestic product in 2012 to be "essentially only flat over the year as a whole."

Tensions on the bond markets mirrored investors' rising doubts about the ability of governments to get to the root of the eurozone's problems and reform their finances.

Slowing growth deepens the dilemma because it reduces tax revenues.

On Monday, the Organisation for Economic Co-operation and Development in Paris warned of increasing signs of a slowdown in most OECD and in major non-member countries.

That came just days after the EU Commission in Brussels warned that Europe could tip back into recession over the course of 2012 due to a "vicious circle" of government debt, vulnerable banks and collapsed spending.

Similarly worrying was an analysis of China's financial system by the International Monetary Fund, which warned on Tuesday that the world's second-largest economy is at risk from bad loans, uncontrolled private lending and sharp falls in property prices.

Tom Rogers, senior economic adviser to the Ernst & Young Eurozone Forecast (EEF) said the latest data "corroborate our view that the eurozone is slipping back into recession and needs decisive policy action to restore confidence and prevent a serious downturn in 2012."

Despite the superficially strong data for Germany and France, "the clear direction of travel for the fourth quarter and into 2012 is for falling output," he said.

For Commerzbank economist Christoph Weil, "the uncertainty caused by the sovereign debt crisis is lying like mildew upon the eurozone economy. Plunging sentiment indicators for months suggest that the eurozone will slide into recession at the turn of the year."

In the latest confidence barometer, the ZEW index of investor expectations in Germany fell to its lowest level for three years in November.

Chris Williamson, chief economist with London-based Markit, said Italy "looks set to be the first of the four largest euro nations to slide back into recession."

He said the outlook "largely rests in the hands of the politicians (and) ... swift action is needed to address the debt crisis and boost business and household confidence (if) ... a serious double-dip recession is to be avoided."

© 2011 AFP

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