FRANKFURT (MNI) – A dramatic slowdown in Eurozone growth will make
it yet harder for the region to emerge from the crisis and likely delay
any tightening moves by the European Central Bank.

Weak German and France data not only raise questions about how fast
the region can grow out of the crisis but also about core countries’
capacity to offer further support to the ailing periphery.

Eurozone growth slowed more than generally expected in 2Q to 0.2%,
the weakest pace since the recession ended in 3Q 2009. A slowdown from a
strong 0.8% gain in 1Q was no surprise, but the data painted a gloomier
picture than initially expected.

Even the previously healthy core economies now show signs of
weakness. In Germany, activity ground to a near halt, with GDP growth of
only 0.1% after +1.3% in 1Q. Activity was stagnant in France after
+0.9%.

Leading indicators do not suggest that the weak data are merely a
correction to strong growth in the 1Q. The Eurozone factory PMIs showed
output stagnant in July (50.2), and the accelerating decline in new
orders (47.6) suggests a downturn is looming.

While the services were still expanding slowly (51.6), the rapid
loss of momentum in only two months suggests the floor has not been
reached. With unemployment still high and wage gains barely keeping up
with prices, consumption is unlikely to gain much momentum in coming
months.

“It is clear that the uncertainty has increased in the world
economy. There is more uncertainty about economic growth than before,”
ECB Governing Council member Erkki Liikanen said Friday.

His comments follow those of fellow Council member Yves Mersch, who
said last week that he “would not exclude that the latest indicators
might play a role in our next round of staff projections.”

Decelerating growth coupled with the recent easing in inflationary
pressures suggest that ECB President Jean-Claude Trichet may signal that
the central bank will keep a steady hand for now after presenting these
new staff forecasts on September 8.

Slowing growth also shows that the region will find it hard to grow
out of the crisis, suggesting that it is here to stay for some time. At
the same time, the weak performance in France and Germany may well erode
their respective governments’ political will and financial ability to
offer ever more support to the troubled periphery.

Expectations of new commitments following the meeting of German
Chancellor Angela Merkel and French President Nicolas Sarkozy later on
Tuesday will likely be disappointed. Both acknowledge that economic
policy coordination is still insufficient to allow the introduction of
eurobonds.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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