Europe’s Economy Spirals Downward

The financial crisis in Europe is getting deeper. For the fourth quarter output fell 1.5%. Forecasts now are for a 3% decline for 2009.

Virtually no country within the Eurozone escaped from the ravages but Germany seems to have been particularly hard hit. Its economy contracted by 2.1% during the quarter. The German economy relies heavily on exports which have been ravaged by the worldwide economic contraction.

Many have criticized the European Central Bank for being tardy in reducing interest rates in response. Its official rate is 2% though it is expected to cut this rate to 1.5% at its meeting next month.

Unless a turnaround occurs fairly shortly, this is shaping up as a test of the viability of the European Union. A number of countries including Spain, Ireland and Greece are in fairly dire economic condition and the constraints imposed upon them by the terms of membership in the Union are exacerbating their situation. While secession would be a desperate move, internal politics could easily force one or more to opt for that solution. The alternative is for the EU to begin issuing debt on behalf of the Union in order to relieve pressure on the basket case countries but this move is also fraught with danger as some of the stronger countries are loathe to go on the hook for the weaker.

With all the attention that has been paid to problems within the United States and Asia, it may well be that Europe ends up being the most profoundly shaken and changed by the crisis.

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