Just as we were beginning to feel that America was past the worst, the Eurozone, almost unnoticed, appears to be slipping into recession. In the three months to June the euro-economy contracted by 0.2%. Normally a loosening of monetary restraints would have eased the position but inflation is running at 4% on average (well over 5% in Spain) and lower interest rates are not possible.
Europe’s banks are in an unhealthy state, commodity and food prices are high. Italy is currently paying 0.6% more on its borrowings than Germany. Several countries, but not all, are experiencing collapsing property prices.
This will be the first test of the eurozone since its founding. People will have to tighten their belts, and the Central Bank in Frankfurt looks like an easy scapegoat. The political test will be how evenly the pain is shared.
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