YUSUFF ALI Thursday, August 23 2012

THE eurozone economy is on the brink of recession, taken as a whole, but countries such as Germany and France continue to outperform Britain. Eurostat, the statistics agency of the European Union (EU), said output in the single currency bloc fell 0.2 percent in the second quarter of the year as the financial crisis took its toll.

The German economy, however, grew by 0.3 percent but output in France was flat. Holland and Austria were up by 0.2 percent. Those figures are considerably better than the 0.7 percent slump recorded in Britain between April and June, bringing more pressure to bear on ministers to jumpstart the economy. In the global growth league table, Sweden, the United States, Germany, Japan, Holland and Austria all saw some growth while the figures for Spain, Belgium, Britain, Italy and Portugal all showed a slump.

Britain’s performance was as bad as that of Italy, this at a time when Rome has asked the EU for help to overcome its debt burden while it trailed even the struggling Spain. Even Finland’s AAA-rated economy shrank one percent between April and June, having grown by 0.8 percent in the first three months of the year.

Calling for a change of course for Britain, an opposition spokesman said that Chancellor George Osborne cannot keep blaming the eurozone for the failure of his plan. But the truth is that the stumbling eurozone economy is making it harder for other countries around the world to recover, including Britain which sells around half of its exports to the region.

Bank of England governor, Sir Mervyn King, has said the crisis in the eurozone is like a “black cloud of uncertainty” over the global economy. Pressure has been mounting on the Bank for an interest rate cut to a historic low of 0.25 percent but this looks to be off the table for now, despite the longest double-dip recession in the UK for more than half-a-century. The rate has been pegged at 0.5 percent since March 2009.

But documents published a week ago showed that such a move was not even discussed at the latest meeting of the Bank’s monetary policy committee. It followed a statement by Sir Mervyn that the impact of a rate cut was “really neither here nor there”.

On the other hand, the committee reiterated its faith in quantitative easing (QE), with some of its nine members tempted to pump more money into the economy immediately. The committee, chaired by Sir Mervyn, eventually voted to hold rates at 0.5 percent and leave QE at £375billion. The minutes of the meeting were published alongside figures from the Office for National Statistics showing that unemployment fell by 46,000 between April and June to 2.56 million or eight per cent, the lowest level for a year.

The figures deepened what the Bank has called the “genuine economic puzzle” of falling output but rising employment. Economist James Knightley said, “The ongoing contradictions between the awful GDP numbers and the relatively firm labour market means that the Bank will continue to sit and wait until the trend becomes clearer.”

Looking ahead at a worst case scenario, senior government sources say secret Treasury estimates indicate that the UK’s output would drop by seven percent if the euro plunges into fresh chaos as a result of a Greek exit. They believe that £105 billion will be slashed from the British GDP which came in at £1.5 trillion last year.

The Greek government is struggling to find another £9 billion of cuts – around five percent of its GDP – for 2013 and 2014. The austerity measures are required under a deal with the EU and the International Monetary Fund, which have bailed out Greece. Pressure is growing in Germany for Greece to be allowed to leave the euro because there are doubts whether the Greeks will ever get to grips with their debts. Here in London, however, there are fears that it would be difficult for Greece to leave without plunging the eurozone deeper into the red, triggering a series of damaging knock-on effects in the UK.