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 The zero growth reported by statistics agency Eurostat on Thursday
was cause for alarm throughout the 18-nation region, which is
already bracing for the impact of sanctions imposed on and by Russia
over Ukraine.
Germany, Europe's largest economy, contracted by 0.2 percent in the
quarter, undercutting Bundesbank forecasts that gross domestic
product would be unchanged. Foreign trade and investment were
notable weak spots, the German Statistics Office said on Thursday.
"Today’s figures show that the upturn remains too weak to withstand
external shocks" - such as the Russian sanctions - "meaning that GDP
growth will probably remain stuck in stop-and-go mode," said Peter
Vanden Houte, chief euro zone economist at ING.
France fared little better; its GDP failed to grow for the second
quarter in a row. That forced the French government to confront
reality, saying it would miss its budget deficit target this year
and cutting its 2014 forecast for 1 percent growth in half.
Italy, the euro zone's third-largest economy, slid back into
recession for the third time since 2008 in the second quarter,
shrinking by 0.2 percent. Pressure grew on Prime Minister Matteo
Renzi to complete promised structural reforms. [ID:nL6N0QC1T3]
 Rome and Paris have led a drive to focus EU policy more on jobs and
growth than on cutting debt. Germany and others have made clear they
will only tolerate so much debate on that point.
Bundesbank chief Jens Weidmann said on Wednesday that euro zone
monetary policy should not aim to weaken the euro. Individual member
states should take steps to boost growth, he said, rebuffing French
calls for Germany and the European Central Bank to do more.
The European Commission said Thursday's GDP report showed the
importance of structural reforms. "The ongoing adjustment in the
euro area today is a story of a deep structural change," a spokesman
for the European Commission told journalists. "External developments
may increase uncertainty, but foundations remain intact."
German Economy Minister Sigmar Gabriel blamed his country's slowdown
on threats from eastern Europe and the Middle East, and a weaker
euro zone. Also, he said, construction continued during a mild
winter, so the second quarter did not see the usual recovery in
building work.
But German GDP should increase in the remainder of 2014, Gabriel
said. "Growth rates in Germany will likely return to growth in the
rest of this year, but the risks from abroad have, without doubt,
increased," he said in a statement. A Reuters poll of economists
conducted over the past week gave only a 15 percent chance that the
ECB will start printing money this year, given its recent gambit to
prime banks with more cheap money does not even kick in until
September.
The poll put the chances of the ECB embarking on a quantitative
easing program at one-in-three in 2015.
France maintained its pro-growth, anti-austerity stance. "We must
adapt the pace of deficit reduction to the exceptional situation ...
of growth that is too weak everywhere in Europe and the exceptional
situation of inflation that is too weak across Europe," the
country's finance minister, Michel Sapin, told Europe 1 radio.
There was no mention of the 2015 goal, when France's public deficit
is due to come into line with the EU's cap of 3 percent of GDP.
Sapin said Paris would cut its deficit "at an appropriate pace".
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Other euro zone countries were a little more robust. The Netherlands
reversed a first-quarter contraction to expand by 0.5 percent,
Austria was up 0.2 percent on the quarter and Finland eked out 0.1
percent growth.
Analysts mainly saw foreign trade and investment behind the
disappointing data. Consumer demand probably helped second-quarter
growth - retail sales rose 0.4 percent on the quarter.
Q3 ANY BETTER?
The worry for the euro zone is that sanctions imposed on Russia
over the Ukraine crisis, and Moscow's retaliation, will act as a
further drag on growth.
The leading index of European shares <.FTEU3> dropped 0.3 percent
after the GDP reports. Yields on safe-haven German 10-year bonds
fell to a record low.
Surveys suggest a rebound in the third quarter is growing less
likely. The ZEW economic sentiment index released on Wednesday, for
example, showed German analyst and investor morale plunged in August
to its lowest in more than 1 1/2 years.
"Downside risks heading into Q3 have intensified, mainly due to the
intensification of geopolitical tensions, the outlook for exports to
Russia in view of the potential effects of sanctions on Russia ...
and the effect of heightened uncertainty," said Evelyn Herrmann, an
economist at BNP Paribas.
Greece, the crucible of the euro zone debt crisis, is showing some
signs of improvement. Its economy shrank in the second quarter at
the slowest annual pace since late 2008, supporting expectations
that Athens will emerge from its six-year slump this year.
[ID:nL6N0QJ20Z]
"Bottom line is that the ECB will have to maintain an extremely
accommodative monetary policy, even if the U.S. will see a first
rate hike already in 2015. The bank will likely be pressured to
undertake additional action if some of the downside risks
materialize," ING's Vanden Houte said.
The European Central Bank left interest rates unchanged at record
lows in July. But the bank signaled that it stood ready to take more
action - perhaps printing money and buying bonds - if the region
slides towards deflation.
"Looking ahead, recent leading indicators are not delivering a very
promising message. Risks from Russia - directly and via second-round
effects from CEE region - cannot be underestimated. Less dynamic
growth for 3Q14 and 2014 is likely," said Martina von Terzi, an
analysts with UniCredit.
(Writing by Mike Peacock; Editing by Jeremy Gaunt, Larry King)
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