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Europe’s woes put a drag on world growth

By Don Lee and Henry Chu, Los Angeles Times –

WASHINGTON — The Eurozone debt crisis is intensifying a global slowdown, with new signs that even powerhouse Germany may be faltering, adding to worry about China and other major pillars of economic growth.

Analysts fear that economies and markets now are so intertwined that the emerging slowdown will further weaken economic confidence in many parts of the world, which is already fragile.

Although heavy indebtedness and belt-tightening are blamed for the shrinking growth in Europe, economists say the biggest developing countries are suffering from the effects of policies imposed by central bankers intent on thwarting inflation. Meanwhile, the United States, the world’s largest economy, is trudging along at a mediocre pace.

“You’ve got a combination of troubles in Europe and a deceleration in the emerging world,” said Nariman Behravesh, chief economist at IHS Global Insight, an economic research company. The result, he said, is that global growth will slow sharply this year from 2011. And trade growth will be half of last year’s pace.

The biggest single threat to the world is Europe’s troubles, which seem to be worsening by the day.

On Thursday a key measure of Germany’s business sentiment and activity fell for the first time in 10 months. Rather than pulling up the prospects for the rest of the region, the continent’s largest and most resilient economy is being dragged down by the escalating problems in Greece and the increasing possibility that Athens will leave the Eurozone.

A separate index of manufacturing and services in the Eurozone, the 17-nation bloc that shares the euro currency, dropped last month to its lowest level in nearly three years, according to data released Thursday. And Britain, which is not in the Eurozone but is Europe’s third-largest economy, said it had contracted more than previously believed in the first quarter, joining Spain, Italy, Portugal and a growing number in Europe that have slipped back into recession.

The gloomy data were released just hours after European Union leaders ended an informal summit with no concrete measures for boosting the region’s economy. Germany and France remain divided on how best to tackle the Eurozone’s more than 2-year-old sovereign debt crisis.

Analysts in the U.S. fear that if Greece abandons the euro, the U.S. economy could suffer as well. Europe is a major market for U.S. exports.

“Importantly, U.S. banks and investors will take a hit from a further declining euro and reduced European bank lending activity in the United States and in countries that buy American products,” said Peter Morici, a professor at the University of Maryland and a former chief economist at the U.S. International Trade Commission.

The U.S. economy relies mostly on its own consumers for growth, and with new jobs growing at a moderate pace and the housing market showing signs of recovery, many experts expect the U.S. to sustain its middling economic expansion even in the event of a Greek exodus from the Eurozone.

“The recovery in the U.S. should now be robust enough to survive a shock that would tip over a weaker economy such as the U.K. or Switzerland,” said Julian Jessop, an analyst at Capital Economics in London. But Europe’s troubles still could hurt confidence in the U.S. economy, he said in a research note this week. “The risks even to the U.S. undoubtedly lie on the downside.”

But the global economy’s problems aren’t confined to Europe. There was hope that some of the world’s biggest and fastest-developing countries — Brazil, India and especially China — would continue to drive growth and pick up the slack in demand. But because of Europe’s slowdown as well as domestic issues, these emerging economies are grappling with slowing of their own.

Central banks in these countries are rapidly moving to lower interest rates and loosen the money supply to boost activity. But Europe is a major export market, and the deteriorating situation there is hampering their efforts to promote growth.

Analysts are worried especially about China, the world’s second-largest economy, which has yet to rebound from its startling slide last month. A survey of Chinese manufacturers released Thursday showed a seventh consecutive month of shrinking activity, raising the risk that China’s economy could be headed for a so-called hard landing that would ricochet around the world.

The danger of a Greek default lies not in the size of the Greek economy, which contributes only about 2 percent of the Eurozone’s gross domestic product, but in the possibility that it could trigger a contagion that leads investors to question the viability of Spain and Italy.

Zoellick predicted that the Europeans would be able to take steps toward improving growth by tapping existing institutions such as the European Commission and the European Investment Bank.

“There will be some steps to increase investment demand. That’s the kind of thing that can get political acquiescence, because to the Germans, it’s investment. But these are modest steps compared to the size of the problem,” he said.

With Germany and France at odds, Europe’s economic crisis broke wide open at the informal summit in Brussels. France’s new president, Francois Hollande, is pressing for more stimulus and for collectively backed government debt in the Eurozone, while German Chancellor Angela Merkel continues to insist on debt and deficit reduction, primarily through harsh spending cuts.

Swelling anti-austerity sentiment across Europe has pushed Merkel onto the defensive. On Thursday, after a meeting between Merkel and top German lawmakers, opposition leader Sigmar Gabriel told reporters that the chancellor had acknowledged the need for stronger measures to promote growth.

“The government’s blockade on this issue has been broken,” said Gabriel, whose support Merkel needs in order to secure German ratification of a European treaty on fiscal restraint she has championed.

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