Seems like Austerity programs arent working.

Euro-Area Economy Seen Almost Stalling
Published: August 16, 2011

FRANKFURT — Economic growth in the euro area fell more than expected in the three months through June, according to official figures released Tuesday, as growth in Germany came almost to a standstill.
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All of Europe’s main stock indexes lost ground after the data confirmed fears that government austerity programs are taking their toll on the European economy, undercutting efforts to contain the sovereign debt crisis.

Gross domestic product in the 17-nation euro area rose 0.2 percent in the second quarter of 2011 compared with the previous quarter, according to Eurostat, the E.U. statistics agency. Euro area growth was down from 0.8 percent in the first quarter.

G.D.P. growth in Germany, which has been the region’s economic locomotive, fell to 0.1 percent compared with the previous quarter, when the economy expanded 1.3 percent, the German Federal Statistical Office said. Analysts had expected growth of 0.5 percent.

“It now looks like growth is slowing in core countries too,” Christoph Weil, an economist at Commerzbank, wrote in a note. “This could intensify the sovereign debt crisis in so far as the readiness and ability of countries with high credit ratings to help crisis-stricken countries will drop as a result. This could trigger a downward spiral in economic growth.”

Instead, what impetus remains in the European economy came from countries like Austria, Belgium and Finland. Even Italy, with growth of 0.3 percent compared with the previous quarter, outperformed Germany in the second quarter.

German and Italian shares led a broad decline in European stocks Tuesday. Germany’s DAX index was down more than 2 percent at midday, as was the FTSE Italia index . The euro fell 0.8 cents to $1.437.

The German economic rebound since the recession of 2009, driven by exports of cars, machinery and other goods to China and other emerging markets, has helped counterbalance weak economies in southern Europe. If Germany slows, the challenges posed by the European sovereign debt crisis will become that much more daunting.

The German figures, which were seasonally adjusted, follow data released Friday that showed that the French economy, Europe’s second-largest after Germany’s, did not grow at all in the second quarter. Slower growth means that tax receipts will also grow slowly, which will make it harder for Germany and France to support countries like Italy and Spain that are finding it increasingly difficult to borrow money at interest rates they can afford.

However, slower growth might lead to lower inflation, which will give the European Central Bank more leeway to keep interest rates low and intervene in bond markets. Since last week, the bank has been buying Italian and Spanish debt on the open market to hold down yields, which had risen above 6 percent, a rate that would have eventually proved ruinous for the two countries.