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Debt problems push Europe nearer recession

Europe is edging closer to recession, dragged down by the crippling debt problems of the 17-country euro bloc, official figures showed Tuesday.

Europe is edging closer to recession, dragged down by the crippling debt problems of the 17-country euro bloc, official figures showed Tuesday.

Eurostat, the European Union's statistics agency, revealed that the economies of both the eurozone and the wider 27-country EU shrank by a quarterly rate of 0.2 per cent in the second quarter of the year. In the first quarter, output for both regions was flat. A recession is officially defined as two straight quarters of falling output.

Europe's woes have been blamed for the sharp deterioration in the global economic outlook. The region is the U.S.'s largest export customer and any fall-off in demand will hit order books.

The eurozone is grappling with sky-high debt levels and record unemployment of 11.2 per cent. Compared with the year before, the eurozone's economy is 0.4 per cent smaller.

The region's economy would have slipped into recession had it not been for better-than-expected GDP figures from its two leading economies, Germany and France. Germany posted quarterly growth of 0.3 per cent, better than the 0.2 per cent uptick it had been forecast. France beat expectations of a small contraction in its output to record no change in its economy for the second quarter.

The region's stumbling economy is making it harder for other economies to grow. Policymakers from around the world want more decisive action, particularly from the European Central Bank, to deal with the debt crisis to restore confidence to the global economy.

"The ECB's recent announcement that it will do 'whatever it takes' to save the euro is welcome, but clarity over what will be done is crucial," said Tom Rogers, a senior economic adviser for accounting firm Ernst & Young.

Markets have grown more optimistic recently that Europe's firefighting efforts will pick up the pace. The positive tone continued Tuesday, largely because of the figures from Germany. The Stoxx 50 index of leading European shares was up 0.6 per cent.

Germany currently benefits from strong demand for its products, but its high-value exporters are finding it increasingly difficult to tap international markets. Forward-looking surveys, including Tuesday's closely-monitored ZEW survey of German investor sentiment, suggest that confidence is taking a knock as Europe moves from one crisis to another.

The other 16 countries that use the euro are Germany's biggest export market and six of them are in recession. The U.S. recently recorded GDP growth in the second quarter down compared with the previous three months at 0.4 per cent, according to Eurostat.

Slower growth is making it harder for governments and central banks to control the debt crisis in Europe.

Shrinking economies make it harder to get public finances into shape. Lower output dents tax revenues while forcing up the cost of social benefits.

"The big picture is that the economic growth required to bring the region's debt crisis to an end is still nowhere in sight," said Jonathan Loynes, chief European economist at Capital Economics.