Bloomberg News

Europe’s Recovery Has Ended as Crisis Hits Core, Rehn Says

November 24, 2011

(Updates with comment in second and sixth paragraphs. See {EXT4 <GO>} for more on the sovereign debt crisis.)

Nov. 24 (Bloomberg) -- European Union Economic and Monetary Affairs Commissioner Olli Rehn said the region’s economic recovery has ground to a halt as the sovereign-debt crisis spreads to the core of the common currency bloc.

“Growth has stagnated and at the moment Europe is at zero- growth,” Rehn said in Helsinki today. “The situation is very grave since the contagion effect that started from Greece and spread to other peripheral euro area countries is now lately touching near the core of the euro area, and in the past days on the core itself.”

The crisis is approaching a tipping point with Germany under pressure either to pick up the bill for saving the union or let the euro collapse. Chancellor Angela Merkel is running out of options to ease the turmoil after rejecting selling common euro-area bonds or using the European Central Bank as a lender of last resort.

“Much depends on how economic policy decision-making succeeds and whether we can return to growth during 2012 or whether the situation deteriorates if we are unable to make the required decisions,” Rehn said.

The European Commission on Nov. 10 cut its euro-region growth estimate for next year to 0.5 percent from 1.8 percent. The ECB, which has extended the use of unconventional tools such as offering banks unlimited cash for more than a year and buying bonds of debt-strapped governments, this month forecast a “mild recession” in the area.

Euro Sinks

The euro tumbled 1.2 percent against the dollar yesterday after Germany failed to sell all bonds on offer at an auction. Europe’s largest economy opposes a plan that would raise money for indebted nations through joint bonds because such a move would jeopardize its top AAA rating. It also wants to have a more integrated budget to police spending across the region.

Bund yields climbed to the highest in almost four weeks after Bild magazine reported that Germany’s government is concerned it may have to agree to the issuing of euro bonds.

The European commission yesterday set out proposals for joint borrowing by the 17 euro nations. The EU’s executive arm said that any so-called stability bonds with joint guarantees would need reinforced fiscal surveillance and policy coordination.

Return to Growth

“Whatever solution we have in mind and we will take must be one that strengthens the euro area’s ability to act and strengthens the ability of individual member states to deal with their debt problem and return to growth,” Rehn said.

--Editors: Jonas Bergman, Tasneem Brogger.

345300Z@ BB <Equity>

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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