Europe's southern rim has the potential to become an engine of growth for the region, but only after several more years in the economic doldrums, weighed down by brutal austerity plans, tight credit and fragile consumer confidence. A run of successful sovereign bond auctions and a tightening trend in yield spreads suggest the euro zone's debt crisis may be easing, but an extended slump in Greece and possible double-dip recessions in Spain and Portugal cast a long shadow over Europe's recovery, keeping markets nervous and potentially impacting monetary policy. The pace of economic activity is slowing again in Greece, Spain and Portugal as austerity plans introduced to keep a lid on ballooning budget deficits sap confidence and put jobs at risk, and credit tightens as banks struggle to raise fresh funds. The outlook is worst in Greece, where the debt crisis started. The government does not expect the economy to grow until 2012, forecasting a contraction in gross domestic product of 4 percent this year and 2.6 percent in 2011. Spain's government expects a 0.3 percent contraction this year while Portugal's sees expansion of 0.7 percent. “The fiscal tightening (in Greece) is going to have to go on for quite some time,” said Ben May, European economist at Capital Economics, adding that the 2011 and 2010 forecasts were “sensible, but I'd be more suspicious of the recovery in 2012.” “The chances are that ... we can see years and years of very weak (Greek) growth or even stagnation,” he said. The situation is similar, if less extreme in Spain and Portugal. “Both ... don't have much capacity to grow in the coming years,” said Filipe Garcia, an economist at the Informacao de Mercados Financeiros consultancy in Porto. Holding out hope to all three is the example of Ireland which, after slashing spending sharply and earlier than the Southern Europeans to counter the euro zone's longest running recession, expects to return to growth of one percent this year. Meanwhile economic activity took a breather in the second quarter in both Spain and Portugal as fallout from the debt crisis took its toll after stronger first quarters. RBS said in a report that Spanish data now points to a slowdown in the recovery. “This is consistent with tensions in sovereign debt markets starting to impact negatively on domestic demand. Spain looks set to ... experience a double dip,” RBS said. With Spain, Italy, Portugal and Greece representing about 30 percent of the euro zone's total GDP, many economists see contagion from the crisis pushing market interest rates in the region higher and hitting confidence. But the troubles in the south are expected to act as a brake on rather than derail the broader recovery, and fears for the single currency's survival appear overblown - at least for the time being. That mood of cautious optimism is partly helped by Italy, by far the largest of the southern European economies, continuing to grow. “Italy is the only country in southern Europe where I don't expect to see a double-dip,” said Gilles Moec, senior economist at Deutsche Bank. “In Italy, there was no big fiscal retrenchment, and any impact on growth (from a recent budget adjustment) will not come until next year anyway.” Italian business chamber Confindustria predicts the economy will grow 1.2 percent this year and 1.6 percent in 2011, slightly above government forecasts. The wave of austerity could hold a silver lining for the rest of the peripheral euro zone economies -- and indeed all of Europe. “There is a possible upside,” said Raj Badiani, an economist at IHS-Global Insight in London. “Come 2014 or 2015 these countries could be a lot leaner and meaner and enjoy a few years of high growth.” In the meantime, in Southern Europe, low growth could make even more austerity necessary, not least because unemployment is likely to remain high, raising government expenditure on welfare. It could also spur more popular discontent and protests against cost-cutting. “The south should not expect one or two weak years but rather several years of low or negative growth,” Marie Diron, senior economic advisor to Ernst & Young said in a report in late June. “Greece, Spain and Portugal are unlikely to return to pre-crisis levels until 2014.”
