"Europe’s Impending Calamity"

European Confidence Drops to Record Low as Recession Worsens
Bloomberg

European economic confidence fell to a record low in February, banks tightened access to credit and German unemployment rose, putting pressure on the European Central Bank to step up its response to the crisis.

An index of euro-region executive and consumer sentiment dropped to 65.4 from 67.2, the European Commission in Brussels said today. Lending to euro area households and companies slowed the most in more than five years, European retail sales declined and German unemployment rose for a fourth month.

“Today’s data has dashed any hope of a tentative stabilization” in the economy, said Jacques Cailloux, chief euro area economist at Royal Bank of Scotland Group Plc in London. “Any sense that the ECB may pause after a March rate cut can be thrown out the window. They will go very low and they will have to start embarking on additional measures.”

Europe’s deepening recession may prompt a rethink at the ECB, which has so far shown reluctance to follow the Federal Reserve and Bank of England and deploy new monetary policy measures. The downturn is also sparking concern about the fiscal health of some nations and the gap between German and Italy bond yields today widened to the most since 1997.

The International Monetary Fund already predicts the euro- region economy will contract 2 percent this year and IMF Managing Director Dominique Strauss-Kahn said Feb 19 that the forecast may need to be cut.

The ECB argues that it needs to be careful not to cut rates too low and officials have struggled to agree on the best approach once conventional measures are run their course.

‘Lowest Limit?’

While the ECB has cut its benchmark rate by 225 basis points since October to 2 percent and President Jean-Claude Trichet has signaled it may reduce again next week, Germany’s Axel Weber says 1 percent is probably the “lowest limit.”

Trichet says no decision has yet been taken on whether the ECB will take steps such as creating money or buying government bonds. The Fed and Bank of England by contrast are already buying securities as part of measures to ease credit markets. The ECB next decides on rates on March 5.

Some ECB policy makers, including Austria’s Ewald Nowotny, are still counting on an economic recovery. He expects a revival “in the last quarter of 2009” and “positive if low” growth the following year. Executive Board member Juergen Stark forecasts a “stabilization” towards the end of this year as stimulus packages take effect.

Bank Aid

Europe’s governments have so far committed 1.2 trillion ($1.5 billion) in bank aid and about 200 billion euros in economic-stimulus packages, swelling budget deficits in some countries.

That in turn has stoked angst about some countries’ ability to meet their debt obligations as their fiscal situations deteriorate. Former Bundesbank President Karl Otto Poehl told Sky News in an interview broadcast today that smaller members of the euro region could default on their debt obligations.

The difference between German and Italian 10-year government bond yields widened to the most in almost 12 years today, with the spread increasing as much as four basis points to 161 basis points.

The euro-region economy contracted the most in at least 13 years in the fourth quarter, shrinking 1.5 percent, as companies scale back output and shed jobs.

German business confidence fell to the lowest in 26 years this month and BASF SE, the world’s largest chemical company, said today it will accelerate plant closures and eliminate at least 1,500 jobs. The number of Germans out of work rose 40,000 this month to 3.31 million, the Federal Labor Agency said today, pushing the jobless rate to 7.9 percent.

Concern about unemployment is in turn prompting consumers across Europe to keep their purses shut. European retail sales fell for a ninth month in February, the Bloomberg Retail PMI showed today.

Today’s data suggests that the first quarter “might not be that much better than the breathtaking deterioration that we saw in the fourth quarter,” said Nick Kounis, chief euro area economist at Fortis Bank NKL in Amsterdam.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net