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Does Weakening Eurozone Mean Recession 2013 for U.S.?

The Eurozone economy contracted in the second quarter, increasing fears that "Recession 2013" for the U.S. is a step closer to reality.

From April to June, gross domestic product (GDP) in the ailing Eurozone region withered 0.2%.
That compares to the prior three months where there was no growth as the area was besieged by the ailing economies of Greece, Italy, Spain and Finland, which all sharply contracted.

"[The contraction] confirmed that the Eurozone is to all intents and purposes in recession, even if it has avoided the technical definition of two successive quarters of negative quarter-on-quarter GDP," Howard Archer, an economist at IHS Global Insight wrote in a note to clients.

The only thing preventing the Eurozone from contracting more in the second quarter and falling back into its second recession in three years was a buoyant economic performance from Germany.

Healthy investment and domestic consumption boosted the German economy and helped it grow 0.3% in the second quarter, topping expectations of 0.1%. The Netherlands also beat expectations, reporting growth of 0.2% for the quarter.

Meanwhile, French GDP didn't budge, sidestepping a highly anticipated contraction.

Germany Can't Stop Recession 2013

But Germany isn't isolated from its neighbors' weak economies.

"The German economy is fundamentally in good structural shape, but can't decouple from the recession in the Eurozone, plus the global economy has also shifted down a gear," Joerg Kraemer, chief economist at Commerzbank in Frankfurt told the Financial Times.

The resilience of Germany and France cannot be sustained and output is expected is drop sharply in the next few months. The German economy is expected to contract in the third quarter as domestic and foreign demand slows significantly.

Ken Wattret, an economist at BNP Paribas, told The Wall Street Journal, "The Eurozone has been able to avoid a "technical' recession by the skin of its teeth thanks to the flat outcome in the first quarter which was a result of the unexpectedly strong data out of Germany."

"As things stand, however, that looks like being a temporary reprieve. With numerous forward-looking indicators of economic activity signaling a continued contraction in GDP in the third quarter, it probably won't be long before the recession is made official," Wattret added.

ECB to Trim Rates to Avoid Recession 2013

An alarming piece of data was the 1% decline in economic output in Finland, a close supporter of Germany in the fight for greater austerity in Europe. The drop underscored how the mounting sovereign debt crisis that has plagued southern Europe is making its way to the Eurozone's more economically-resilient core northern states.

The gloomy outlook puts additional pressure on the European Central Bank to intercede to fund the economy, primarily by trying to get credit flowing again through a stationary financial system.

Just last month, ECB President Mario Dragi vowed the bank will do "whatever it takes to save the euro."

Several economists expect the ECB will cut interest rates from 0.75% to 0.5% as soon as next month. A move sooner than later appears warranted as the contagion has clearly spread.

Slowing economic growth throughout the Eurozone region is making it more difficult for governments and central banks to find ways to solve their fiscal issues. Shriveling economies make it harder to get public finances in shape, and lower output curtails tax revenues while forcing the cost of social benefits to rise.

"The big picture is that economic growth required to bring the region's debt crisis to an end is still nowhere in sight," Jonathan Lyons, chief European economist at Capital Economics told Fox News.

Will Europe's Woes Spread to the U.S.?

As recession fears taunt Europe, the growing worry and threat is that the European crisis will plague the stressed U.S. economy. A recent spate of unhealthy data from the housing market, the Labor Department and manufacturing sector reveals contraction across the board, mirroring Europe's woes.

A recent analysis of global manufacturing numbers from Bank of America Corp. (NYSE: BAC) showed 17 of 24 countries are reporting a contraction in the manufacturing sector.

"The ongoing sovereign debt and banking crisis continues to weigh on the region's economic activity and sentiment. The euro area slowdown is beginning to impact the rest of the world," writes BofA.

The decelerating U.S. economy has been heavily reliant on bailouts and interventions which have done little to show any kind of sustained improvements. Growth is still slow and unemployment remains high.

Money Morning's Martin Hutchinson said the answer to U.S. fate lies in the currency.

"The answer comes down to fate of the euro. It's the linchpin to everything," Hutchinson wrote July 2. "If only Greece leaves the euro, not much will change. If that's the case and the other Eurozone countries remain part of the euro, they will probably redouble their efforts to sort out their national budgets and banking systems to make it work."

"The problem arises if the Eurozone breaks up altogether, with all of its members resuming their former currencies, or if one of its major members such as Spain or Italy leaves the euro," continued Hutchinson. "Only if the euro breaks up altogether would the disruption be sufficient to affect the U.S.– especially if countries re-impose exchange controls or tariff barriers."

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  1. Kris Kristoffersen | August 14, 2012

    Does Mario Dragi truly understand what would the "whatever it takes" need to be for the ECB to save the euro? I am not convinced at all he knows even where to begin.

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