Tale of two Europes as Germany surges ahead

A SHARP slowdown in economic growth has raised fears of a worsening outlook for Europe and highlighted the widening gap between a strengthening Germany and its 15 eurozone partners.

• "The German economy looks set to outperform the rest of the eurozone for years to come" Christoph Weil of Commerzbank Picture: AP

The European Union said that GDP growth fell steeply in the last quarter as countries struggled to cope with the triple whammy of slower global growth, renewed sovereign debt fears and fiscal tightening.

But Germany - the eurozone's biggest economy - continued to power ahead as it enjoyed its sixth successive quarter of growth. Howard Archer, an economist at IHS Global Insight, said the other eurozone countries faced "serious headwinds" ahead and predicted further falls in overall growth in the fourth quarter and the early months of 2011.

The European Union statistics showed that eurozone GDP growth more than halved to 0.4 per cent in the third quarter of 2010 - and that growth was mainly thanks to continued robust performance by Germany, which grew 0.7 per cent on the quarter.

The second biggest, France, saw growth of 0.4 per cent quarter-on-quarter but in Greece, which needs economic growth to convince markets it will be able to repay its debts, the economy shrank 1.1 per cent.

Commentators believe the gap between Germany and other countries is likely to lead to tensions between eurozone members.

Christoph Weil, an economist at Commerzbank, pointed out that the German economy had substantially improved its competitiveness in the past few years while others had failed to do so.

"In the coming quarters tensions will continue to mount because the German economy looks set to outperform the rest of the eurozone for years to come," he said.

Archer argued that consumer spending in eurozone countries was likely to continue to be limited by persistently high unemployment and muted wage growth.

"An exception to this, though, may be Germany, given that the country has low unemployment, improving wage growth, high savings rates, and some likely pent-up demand," he said.

The news came amid more concerns for the Irish economy after the cost of its borrowing rose following comments by German chancellor Angela Merkel that taxpayers could not be left to bail out debt-ridden countries. The euro slid to a one-month low versus the dollar as France also backed German calls for investors to share the cost of restructuring sovereign debt.

Meanwhile Bank of Ireland - the republic's largest by market value - yesterday forecast underlying full-year operating profit would drop by up to 40 per cent in 2010 due to lower income and the costs of government guarantees. The bank said its underlying operating profit before impairment charges will be between 35 and 40 per cent lower than the €1.5 billion it achieved in 2009.Despite a gloomy week for the Irish economy, the bank reassured on bad debts and said Irish mortgage arrears are stabilising. Shares in Bank of Ireland slumped to their lowest level in over 18 months this week, but recovered slightly yesterday closing up €0.02 at €0.41.