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Financial crisis sends eurozone economy to brink of recession
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The eurozone economy is now on the brink of recession as the financial crisis is devastating the 15-nation bloc sharing the euro currency.

For the first time, economic growth in the eurozone recorded a quarterly decrease in the three months from April to June this year, figures from the European Union (EU)'s statistics bureau Eurostat showed Wednesday.

But things have been getting worse after the negative growth in the second quarter, mainly due to the escalating financial crisis, which suggests that there is little chance of the eurozone economy rebounding in the following months.

In technical terms, recession means negative growth in two consecutive quarters.

As EU Economic and Monetary Affairs Commissioner Joaquin Almunia said Thursday, forecasts of a recession in Europe and the United States could become the "central scenario."

Forecasts for recessions on both sides of the Atlantic "run the risk of becoming the central scenario in the coming months," Almunia told a conference in Madrid, Spain.

The financial crisis, which originated in the United States, has deepened in Europe in recent weeks, with several European banks falling prey to the global credit crunch, prompting EU governments to save their banks by injecting large amounts of money or even nationalizing them.

Without any knowledge of which one would be the next victim, financial institutions in the eurozone have become extremely reluctant to lend to each other, resulting in a more serious credit crunch.

Despite furious efforts by the European Central Bank (ECB) to inject liquidity into the financial markets, no big turn was observed.

Economists fear that a prolonged money market freeze would have a significant impact on overall lending to businesses and individuals, undermining confidence and threatening the real economy.

Figures from the European Commission showed that economic confidence in the eurozone continued to fall in September, hitting the lowest level since November 2001, i.e. shortly after Sept. 11,2001, terrorist attacks in the United States, while the business climate decreased significantly to values last observed in 2003.

Last month, Almunia warned that the financial crisis is hurting Europe's real economy.

"There can be no doubt that events in the financial sector are hurting the real economy," he told a European Parliament plenary session.

Almunia said the effects of the financial turmoil have been compounded by the inflationary pressures of rising oil and commodity prices and the severe housing market corrections in some EU member states.

"This combination of shocks has impacted directly on economic activity via higher costs and negative wealth effects and indirectly via a sharp erosion of economic confidence," he said.

"The result has been a break on domestic demand at a time when external demand is fading," he added.

With the threat of the financial crisis on one side, the eurozone economy also faced inflation which remained stubbornly high at 3.6 percent.

The Frankfurt-based ECB prefers a ceiling of 2 percent to maintain price stability.

High inflation erodes purchasing power of every family, dampening private consumption, a key driver behind eurozone economic growth.

Official figures showed that consumption expenditure, investment and exports, the three major economic engines in the eurozone, all cooled down in the second quarter, decreasing from the previous three months by 0.2, 1.0 and 0.2 percent respectively.

Among large members in the eurozone, Germany, France and Italy, which together make up two thirds of the eurozone gross domestic product, all reported a quarterly drop in the second quarter. So far, Ireland and France have fallen into recession.

Analysts warned that with no sign of recovery, recession is just around the corner for the eurozone.

Early September, the European Commission revised down its forecast for eurozone economic growth this year by 0.4 percentage points to 1.3 percent. At that time, it was stressed that risks to the growth outlook were on the downside.

The Commission said the dramatic events in the financial markets in the last few weeks are reinforcing that view.

In an emergent bid to restore confidence and avoid an economic crash, the ECB abandoned its long-time hawkish policy of refusing to lower its interest rate and joined hands with the world's major central banks Wednesday by cutting its benchmark rate by 0.5 percentage points.

(Xinhua News Agency October 10, 2008)

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