Germany’s stagnation slows down European economy

EUROPE’S economy lost steam in late 2005 as German growth screeched to a halt, but European Union finance ministers and economists yesterday clung to the belief that a long-forecast upturn would materialise this year.

As the ministers met in Brussels, Berlin said its economy stayed flat in the final three months of last year, bad news on the heels of France's announcement on Friday that it was close to stagnation in the same period.

Growth in the 12-nation eurozone as a whole ended the year as poorly as it started, with a preliminary estimate from the Eurostat statistics office showing a GDP rise of 0.3% in the October-December period after two stronger quarters.

Euro group president Jean-Claude Juncker of Luxembourg, who chaired Monday's portion of the two-day talks, said he was still banking on acceleration, while highlighting renewed concern over the price and security of oil supplies.

Austrian Finance Minister Karl-Heinz Grasser chimed in at a news conference, saying government tax revenue reports showed increases that jarred with the preliminary GDP readouts suggesting GDP data was underestimating real growth.

"We have good reason to be optimistic" about 2006, said Mr Grasser, whose country holds the rotating EU presidency.

Growth in the eurozone would still come in as forecast at 1.3% for 2005 after 2.1% in 2004, said Economic and Monetary Affairs Commissioner Joaquin Almunia, who added that fourth-quarter growth was disappointing.

Preliminary data from the Federal Statistics Office showed the German economy stagnated in the last three months of 2005 because of declines in private and government consumption that offset stronger investment.

It said investment, especially in construction, was the sole stimulus.

Economists, who have long been betting like politicians and central bankers on recovery, stuck to their guns and the German chambers of industry and commerce predicted the strongest German growth this year since 2000, when the dotcom bubble burst and triggered years of poor growth.

Official GDP reports were somewhat better in Spain and the Netherlands, with a pickup in the quarter-on-quarter pace of expansion to 0.9% in Spain in the last three months of 2005 and a Dutch pickup to 1.0%.

Mr Juncker sounded cautious about the risks from high oil prices due in part to increased tension in the Middle East, a threat highlighted when ministers of the Group of Eight rich industrial economies met in Moscow last weekend.

He did not explicitly mention the problems that have sparked renewed worry a standoff with oil-rich Iran over its nuclear plans or recent problems with Russian gas supplies caused in part by a spat with Ukraine.