EU economic outlook dims amid impasse

Paris - Economic reports Thursday showed Europe's prospects dimming as the long battle to defend the eurozone continues to undermine confidence and raises the prospect of a renewed cycle of demands for austerity.

The relentlessly bleak data, reflecting weakness across the Continent and in Britain, came a day after political leaders again failed to break the deadlock over how to resolve the European debt crisis.

Regardless, European markets recovered after some steep losses Wednesday, but perhaps only because traders needed to cover their recent losses. The common currency, meanwhile, renewed its fall, dropping to $1.2573.

James Nixon, an economist with Societe Generale in London, said Europe's slow search for a way out of the crisis was "extracting a very high price in terms of the economy, as well as feeding back into the problems of the banking sector. It's just making this whole problem bigger."

Nixon said fears of a Greek exit from the eurozone were probably overblown, and that the situation - which has already proved "remarkably durable" - could continue to fester for some time. A parliamentary election set for June 17 in Greece could result in a government that would repudiate the bailout terms that European leaders have insisted on.

"I don't think there's an imminent Armageddon," Nixon said. "So the euro crisis will probably go on."

But Jennifer McKeown, an economist in London at Capital Economics, wrote in a research note that the data suggested the growing economic weakness was outpacing the response from policymakers.

"A deepening and spreading economic downturn will further reduce the currency union's chances of survival and looks set to put more downward pressure on the euro exchange rate," she wrote.

A Markit Economics index that tracks the European services and manufacturing sectors fell in May to 45.9 from 46.7, worse than economists surveyed by Reuters and Bloomberg had expected. An index reading below 50 suggests the economy is contracting. In the first quarter, the eurozone economy grew just 0.1 percent.

Perhaps even more worryingly, German data released Thursday showed signs of a slowdown in an economy that until now had been a bright spot for the Continent. A Markit index based on surveys of purchasing managers of German manufacturing companies fell to 45.0 in May from 46.2 in April.

A separate report from the Ifo Institute, based on surveys of German companies, showed "greater pessimism about their business outlook," and noted that the "recent surge in uncertainty in the eurozone is impacting the German economy."

The data serve as a reminder of how difficult a task European leaders face as they try to shrink budget deficits in a weak economic environment. If recession sets in and gross domestic product declines, then by definition deficits will grow as a percentage of GDP. According to the brand of budget orthodoxy being pushed by Germany and its allies, that would then require further budget cuts, possibly extending the cycle of decline.

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