Soft core

Euro zone: The euro zone’s exit from the crisis has just got a little bit harder. The German economy grew by only 0.1 per cent during the second quarter. The disappointment coincides with weak data for euro zone growth as a whole, and reinforces the impression that the bloc’s core economies are feeling the global “soft patch”. Europe’s ability to grow its way out of trouble is in doubt. And it’s not clear that much can be done about it.

Europe’s equity markets dipped about 1 per cent in response to the German data. But it would be wrong to overreact to one quarter’s numbers. The first three months of the year were especially strong for Germany and, taking first-half data as a whole, the economy is still growing at an annualised rate of about 3 per cent, as JPMorgan notes. Still, July business surveys have showed a slowdown and the prospects of a rapid bounce back in the third quarter look remote.

The picture across the rest of the euro zone is mixed. Italy has also been a disappointment and France didn’t grow at all in the second quarter. But German neighbours Belgium and Austria are growing, and even Spain’s economy expanded a little.

The data provides a sober backdrop for today’s summit between German chancellor Angela Merkel and French president Nicolas Sarkozy. But it is not yet serious enough to justify a radical policy u-turn. Many will argue that the austerity measures being demanded across the euro zone have gone too far and demand that belts be loosened. Even Christine Lagarde, the new head of the International Monetary Fund, has talked about the need to balance medium-term fiscal tightening with near-term policies to support growth. But, as she seems to acknowledge, the markets want fiscal adjustments here and now. The data probably needs to get worse before investors will tolerate any softening.

That leaves monetary policy. The European Central Bank has raised rates twice, to 1.5 per cent, and had been indicating its readiness to tighten further. The situation isn’t dark enough to justify rate cuts yet. But deferring planned rate hikes would itself be a form of easing. Right now, the euro zone looks like it needs it.