Europe in deepest recession since War as Germany suffers

German economic policy is "bankrupt", economists have said.

By Edmund Conway and Angela Monaghan
Last Updated: 7:34PM BST 15 May 2009

Not much to shout about: the sunny mood and days of the 2006 World Cup seem a long time ago as Germany has suffered increasing economic woes, including a record contraction in the first quarter of this year Photo: AP The declaration was made as it emerged that Europe's biggest economy has now suffered a worse "lost decade" than Japan and is deeper in recession than any other major economy.

On a day of dismal news for the European economy, official figures also showed that Italy, Austria, Spain and the Netherlands are facing their biggest combined slump in post-war history, sparking warnings about the potential for social unrest throughout Europe.

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G20 summit: tensions high following talks to find global recession dealWithin hours, the managing director of the International Monetary Fund (IMF) warned that the global recession is far from over and that people must prepare themselves for more financial shocks. Dominique Strauss-Kahn said the world remains in the grips of a "Great Recession" and played down talk of "green shoots".

Germany's economy shrank by 3.8pc in the first three months of the year - a record contraction that is almost double the fall of Britain's gross domestic product in the first quarter. The figures sparked attacks on Germany's government, which has repeatedly shown reluctance to bail out either its economy or financial system.

In figures described by economists as "disastrous", Eurostat also reported that Italy shrank by 2.4pc, Austria and the Netherlands by 2.8pc, Spain by 1.8pc and France by 1.2pc. The statistics underline the fact that although Britain's financial system was badly hit in the early months of the crisis, the UK's economy has not fared as badly as its continental rivals, contracting by 1.9pc in the first quarter.

The sharp German contraction - the worst since the Second World War - follows news that the bill for bailing out its economy is likely to exceed the cost of re-unification in the years of austerity after the fall of the Berlin Wall. Economists said that the country's reluctance to move quickly to cut taxes and raise spending was largely to blame.

The export-reliant country has been hit hard as world trade nose-dived in the latter months of last year. Charles Dumas of Lombard Street Research said: "German economic policy is bankrupt, and the Mediterranean countries stuck in EMU are also condemned to ongoing economic collapse.

"Already we have real GDP levels that are up only about 3pc from 2000 in Germany and Italy – ie growth has been only a little over ¼pc a year – making this a lost decade for much of continental Europe on a worse scale than Japan in the 1990s."

Mr Strauss-Kahn, who was speaking in Vienna, said that although there were early signs of improvement in some of the economic surveys, the global downturn is not finished, with more financial shocks likely.

"This crisis is not yet over, and there will, in all likelihood, be further tests ahead," he said.

However, Mr Strauss-Kahn said the global economy would "almost certainly" avoid a crisis as severe of the 1930s Great Depression because of the co-ordinated action taken by world leaders.

"World leaders embraced multilateralism, and are reaping the rewards. Vehicles like the G20 were used to coordinate policies and deliver a unified message," he said.

The IMF has called for a global fiscal stimulus equal to 2pc of the world's gross domestic product. ... ffers.html