While US heads for recovery, Europe gets bogged down

Three denominations, the US dollar, the Iranian rial and the Iraqi dinar are placed side-by-side at an exchange stall close to the al-Kazemiya mosque complex where the shrine of imam al-Khazem is located in Baghdad, Sunday. The dollar has become the hard currency in Baghdad, standing at close to 1,500 dinars following the US-led invasion of the country. Prior to the war the dinar stood at 2,500 dinars to the dollar. PHOTO: AFP

Just as the US economy shows signs of a bounce following the Iraq conflict, Europe's appears headed for the quicksand.

Figures published over the past week made gloomy reading for optimists hopeful for a sign of recovery in the euro zone's biggest economies.

In recession-hit Germany, the biggest of the 12 single-currency members, a total of 9,747 companies went bust in the three months of this year, a rise of 9.4 percent from the same period last year.

Business morale is now at its lowest level since the last time Germany was in recession, in 1993, according to the DIHK federation of chambers of commerce.

In France, the second-biggest euro economy, the official statistics institute INSEE predicted that this year's growth would be the lowest in 10 years at just 0.8 percent.

On the other side of the Atlantic, meanwhile, the Conference Board's index of leading economic indicators, which aims to predict activity in the coming months, rose 1.0 percent last month -- the biggest increase since December 2001.

Several factors have combined to depress the euroland economy in recent weeks: business and consumer confidence has yet to pick up after the Iraq war and the rise of the euro has damaged export prospects.

Unemployment shows little sign of easing, dealing a further blow to fragile consumer spending.

France expects a jobless rate of 9.6 percent by the end of the year. The number of Germans out of work is set to top five million.

"Dragged down by the difficulties of Germany, the euro zone is heading towards recession," according to CCF economists.

The European Central Bank (ECB) has slashed its projections for euro-zone growth this year and next owing to the strong euro and big economic unknowns, such as the SARS epidemic.

The ECB said it now expected the 12-nation area to grow by just 0.4 percent to 1.0 percent this year and only 1.1 percent to 2.1 percent in next year.

Many observers expect further cuts to the ECB's main interest rate, which at 2.0 percent now stands at its lowest level since the bank took over the monetary policy reins in January 1999.

"The sharp appreciation of the currency is hurting both expected demand and corporate profitability," said Morgan Stanley economists.

"Thus, it is likely to take a significant toll on corporate spending and employment," the economists said.

The one benefit to the euro's rally against the dollar is that inflation is being quelled as a result, although with the euro area economy so weak, some now fear the onset of Japanese-style deflation.

Another import from the world's second-biggest economy could be a massive spending spree on public works.

Italy this month unveiled a vast program of public investment in Europe, mostly on transport networks such as high-speed trains.

The plan would be financed by the EU's European Investment Bank, neatly side-stepping national deficit limits mandated by the euro zone's Stability and Growth Pact.

The pact's limits on public deficits mean countries can no longer spend their way to recovery. France, Germany and Italy have already run afoul of the rules.

But if the Japanese experience is anything to go by, throwing money at the problem will not by itself make it go away.