The euro zone's repeated failure to tackle its debt crisis is catapulting the bloc toward recession, raising the specter of dangerous spillovers to the rest of the world economy. Whittling down the euro area's mountain of debt was always going to be a long slog, even without the unpredictable political dramas in Greece and Italy that overshadowed last week's summit of the Group of 20 major economies in Cannes on the French Riviera. But the inability of euro zone leaders to convince their G20 counterparts that they were getting a grip on events has made the task that much harder. Confidence, already fragile, has frayed further. “It's no wonder that people aren't spending when all you hear every day is about ‘the crisis',” said Michel Quintao, co-owner of a wrought-iron workshop in this corner of southeast France, some 200 km (125 miles) from Cannes. Even before the G20 meeting and an inconclusive pair of euro zone debt-crisis summits last month, the corrosive effect of flagging confidence was taking a toll on growth. The euro zone's composite purchasing managers' index, a timely gauge of business sentiment, fell sharply in October to 46.5 from 49.1 in September, while German manufacturing orders slumped 4.3 percent in September. Jim O'Neill, chairman of Goldman Sachs Asset Management, said the figures suggested the 17-member euro zone was already in, or close to, recession - explaining why the European Central Bank cut interest rates last Thursday, to the surprise of many investors. O'Neill said the spread of economic weakness from the periphery to the core of the euro zone was in large part due to contagion via the financial markets, especially the relentless pressure on Italian bonds. “They desperately need somehow to stabilize Italian financial markets,” O'Neill said. Undermined by market mistrust of Prime Minister Silvio Berlusconi's government, Italy's 10-year bonds yields soared to a euro era high of 6.4 percent last week. That is close to levels that made the debt-service burdens of Greece, Ireland and Portugal unsustainably onerous and triggered bailouts by the euro zone and the International Monetary Fund. But Italy, with 1.9 trillion euros in public debt, is simply too large to bail out. O'Neill said it boiled down to vanishing confidence. After all, until July, Italy was relatively untouched by the maelstrom despite weak growth that has averaged just 0.6 percent a year since the euro was created in 1999. Even now, its cyclically adjusted budget position is one of the strongest of any major economy. “It's a crisis of confidence: Italy needs leadership and supply side reforms to boost growth,” O'Neill said. As Europe bumbles, the rest of the world is watching anxiously, fearful of the fallout. The United States is perhaps only half-way through its own debt workout. Recovery from the 2008/2009 recession is the weakest on record and, even though economists have marked up their forecasts for fourth-quarter growth, a slump in Europe could revive fears of a relapse.
