Recession fears engulfing Europe

By Duncan Bartlett Europe business reporter, BBC News, Brussels

A mood of fear and pessimism is starting to descend on Europe. It now seems the region could head into recession even before the United States.

Martinsa is a victim of Spain's economic contraction

A leading Spanish property group, Martinsa-Fadesa, filed for bankruptcy earlier this week.

Like Spain, Ireland has suffered a housing market collapse and many people have run up huge personal debts. The Irish economy shrank earlier in the year and economists say that if it continues to contract, the nation will fall into recession by the end of 2008.

Despite this, the Irish Prime Minister or Taoiseach, Brian Cowen, has insisted his country is still doing remarkably well, despite the global economic downturn, and has rejected claims that he is personally responsible for the downturn.

Denmark is already in recession and shows no sign of emerging from it in the near future. The government there stepped in to rescue a failing bank, Roskilde, in early July.

Other famous Danish firms such as the audio and television maker, Bang & Olufsen, are also in trouble. It has issued three profit warnings in the past six months.

The biggest problem facing all of Europe's economies is a sharp rise in inflation. For the Eurozone as a whole, it now stands at 4% - double the 2% target set by the European Central Bank.

The ECB raised its main lending rate earlier this month by a quarter of one percent to 4.25% in an attempt to keep a lid on inflation. It may take a long time for that move to have an impact on prices.

Hard times

Nick Kounis, chief economist of the Belgian bank Fortis, says he has become increasingly gloomy about the eurozone economy because of rising oil prices.

"They have been the main reason the European Central Bank brought forward its interest rate rises - and higher rates will dampen demand and have a direct impact on consumer spending," he says.

If you compare Germany with the rest of the eurozone, it is still outperforming Timo Klein, Global Insight

He is also concerned about the situation in emerging market countries with which the EU does a great deal of trade.

"These emerging economies are hugely important to the eurozone, because they buy a large percentage of our exported goods. Most of the recent growth in European exports has been to those countries.

"But rising oil and food prices are hurting their economies too and that is bound to have a knock-on effect on Europe's economy."

Timo Klein, an economist at Global Insight in Frankfurt, now believes the eurozone has a 30% chance of falling into recession. However, he is upbeat about Germany.

"If you compare Germany with the rest of the eurozone, it is still outperforming," he says. That is partly because exports of specialised German equipment and machinery are still strong.

"These goods are not easily substituted by similar products from other countries," says Dr Klein. "In terms of quality, many German companies are world leaders. If you want the best of certain type of product, then you have little choice but to buy it from Germany."

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