(From THE WALL STREET JOURNAL)
By Geoffrey T. Smith, Tom Fairless and Santiago Perez
The Spanish and German finance ministers will meet for crisis talks in
Berlin on Tuesday, as Spain's travails threaten to bring the European
debt crisis to a critical point.
Spain's output contracted 0.4% in the second quarter, a report
published Monday by Spain's central bank showed. After a 0.3% fall in
output in the first three months, Spain is now considered by most
economists to be in recession. The Bank of Spain expects the economy
to shrink 1.5% this year.
By contrast, Germany's economy probably grew moderately in the
quarter, the Bundesbank said in its monthly report -- its shorthand
for growth between zero and 0.5%. That follows relatively robust
first-quarter growth of 0.5% that helped keep the euro bloc out of
recession.
Germany's economy, Europe's largest, has remained relatively resilient
amid the debt crisis that has enveloped its euro-zone peers. But with
Spain and Italy, the euro area's third-largest economy, both shrinking
this year, it looks increasingly likely that Germany -- which depends
on the euro zone for around 40% of its exports -- will be affected.
Late Monday, Moody's Investors Service downgraded to negative the
outlook on Germany's sovereign rating, currently at triple-A.
Earlier Monday, the Bundesbank had warned that the outlook for the
next quarters is "characterized by great uncertainty," pointing to
recent indicators that have reflected falling optimism among German
businesses. The expectations component of the Ifo business confidence
index turned down already in May and is expected to hit its lowest
point in nearly three years in July's survey, expected Wednesday.
Economists have warned for more than a year that the euro zone's
limited financial backstops couldn't cope with the collapse of one of
its larger economies, and Spain is the region's fourth-largest,
accounting for nearly 12% of euro-zone output -- twice as much as
Portugal, Ireland and Greece combined.
Tuesday's meeting between German Finance Minister Wolfgang Schauble
and his Spanish counterpart, Luis de Guindos, comes after Germany's
parliament last week ratified a program to bail out Spanish banks. On
Monday, Spanish government bonds weakened substantially, and the
country's benchmark index tumbled.
As expected, the combination of rising unemployment and intensified
attempts by the government to cut its budget deficit hurt domestic
demand, which fell 1.2%. Spain's export sector cushioned the
contraction somewhat, the central bank said.
In Germany, the domestic sector supported the economy, the Bundesbank
reported. Rising wages and employment helped ensure that construction
and services remained buoyant, while the export-sensitive industrial
sector was hit by a slowdown in foreign demand.
The gloom isn't confined to businesses. The European Commission's July
consumer confidence survey, published Monday, fell to an index level
of minus 21.6 from minus 19.8 in June, well below its long-term
average of minus 12.8. The scale of the drop suggests it was spread
across the euro zone. That decline suggests consumers are unlikely to
spend more in coming months -- another drag ongrowth.
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(END) Dow Jones Newswires
July 23, 2012 19:47 ET (23:47 GMT)
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