By Marcus Walker, Brian Blackstone and Matthew Karnitschnig
BERLIN--The 18-country eurozone eked out only weak growth in the
third quarter, underlining how Europe is still struggling to escape
its six-year slump.
Expectations have become so bleak lately that analysts welcomed
the eurozone's annualized growth rate of 0.6% in the last quarter
as a positive surprise. Germany barely grew, France grew but
largely because companies built up inventories, and Italy fell back
into recession.
The bloc's gross domestic product remains more than 2% below its
level before the 2008 global financial crisis--at a time when
growth in other advanced economies such as the U.S. and U.K. is
finally strengthening.
One silver lining was that Greece, which triggered Europe's debt
crisis and has suffered the region's deepest depression, reported
Friday that its economy grew in the last two quarters, for the
first time since mid-2008. Greece's economy remains about 25%
smaller than it was six years ago, however.
Overall, the $12 trillion eurozone economy--second only to the
U.S. in size--is stuck with too-little growth or inflation to mend
its imbalances, reduce high public and private debts, or
significantly cut its chronic unemployment.
The failure of eurozone output, investment and employment to
recover to past levels, and the dwindling of annual inflation
toward only 0.4%, point to a chronic lack of demand in Europe's
economy.
Weak demand from customers was the most pressing problem facing
companies of all sizes in the currency zone, according to a
business survey by the European Central Bank published this past
week. That is seen as more worrying than other hindrances including
labor costs, red tape and access to credit.
"We're stuck in a rut, and I don't think demand for products is
going to increase that much until wages rise," said Ricardo
Palazuelo, a Spanish salesman for the Swiss-watches group Festina.
The company only has half as many salespeople in Spain as it used
to, he noted.
Many business leaders warn that the weak sales outlook is
discouraging them from investing in the region--challenging
European Union leaders' hopes that private activity will drive the
recovery while governments pursue budget austerity.
As a result, more European corporations are focusing the bulk of
their investment in the U.S. or emerging economies, where sales are
more likely to grow. The Ukraine-Russia conflict has also hit
business confidence in parts of the Continent.
"The picture is very mixed in Europe and we gave a more cautious
outlook in late October driven by the increased geopolitical
uncertainties, but also by the weakening European economic
environment," said Ulrich Spiesshofer, chief executive of Swiss
engineering giant ABB Ltd.
The Zurich-based group reported a drop in third-quarter earnings
due to sluggish European business, and is redoubling efforts to
expand into continents where the outlook is brighter.
"Growth is still nowhere near strong enough to eat into the vast
amount of spare capacity in the region and hence diminish the risks
of a prolonged and damaging bout of deflation," said Jonathan
Loynes, economist at London-based consultancy Capital
Economics.
Deflation refers to persistently falling prices that deter
spending and investment and make it harder to pay off debts.
In Germany, companies from consumer-products maker Henkel AG to
construction group Hochtief AG are reporting dwindling earnings
from their European activities and are shifting more of their
investment ambitions overseas. "In Europe we do foresee a
struggling economy" also in coming quarters, with weak consumer
spending, Henkel CEO Kasper Rorsted told analysts on Thursday.
In France, which is under pressure from Germany and EU
authorities to overhaul its economic regulation, 47% of industry
executives said lack of demand is their main problem in an October
survey by the national statistics office INSEE, up from 40% in
July.
Only 16% said supply-side issues were their main problem, while
11% said both supply and demand factors were holding them back.
Many eurozone policy makers, led by the German government, have
argued that higher growth can only come via supply-side
overhauls--particularly rule changes that make it easier to lay off
workers and that weaken the bargaining power of labor unions in
wage talks. Berlin and EU authorities are leaning on France and
Italy to make such changes, emulating reforms in Spain, among other
places.
Economists say such market-oriented changes can improve
economies' long-term performance by easing the switch of workers
and capital from older to newer industries.
But while inflexible labor rules have dogged parts of Europe for
two decades or more, the region now faces another problem, many
economists say: masses of idle labor and capital because of weak
demand in a region where consumers, businesses and governments have
all tightened their belts.
"It is clear that both demand and supply-side policies are
necessary," ECB President Mario Draghi said at an economics
conference in Rome on Tuesday. He said the ECB alone can't lift
public and private investment, which remain well below their 2007
levels.
The ECB is trying to raise inflation to nearer its 2% target by
buying large amounts of assets, potentially including government
bonds if other measures fail.
But ECB officials are also stepping up their campaign to
convince the eurozone's financially stronger governments, including
Germany, to spend more, arguing that monetary stimulus won't work
if fiscal policies are too tight for the weak state of the
economy.
"While monetary policy can and should be used in full, it is
clear that it cannot bear the entire burden of stimulating growth
in the region in the context of weak aggregate demand conditions,"
ECB executive board member Benoît Coeuré said Friday in
Washington.
Fiscal policy "should be used where it is available, in
particular...by incentivizing investment," Mr. Coeure said.
In a challenge to Germany's prescription, Mr. Coeure said more
"internal devaluation"--depressing wages and prices in Southern
European countries to make their exports more competitive--"cannot
be the answer," because it would do little to boost output overall
in a Europe with inadequate demand.
Most German officials and economists reject the growing
consensus elsewhere in Europe that the region is struggling with
deficient demand in addition to its old supply-side woes. "We don't
think it is an aggregate demand problem. It is that there are not
enough structural reforms," a senior German government official
said.
David Román, William Horobin, Inti Landauro and Neetha Mahadevan
contributed to this article.
Write to Marcus Walker at marcus.walker@wsj.com, Brian
Blackstone at brian.blackstone@wsj.com and Matthew Karnitschnig at
matthew.karnitschnig@wsj.com