How close is a European double dip?
ONE can't be certain, but it seems as if the latest European market panic may—MAY—have come to an end. The European Central Bank's purchases of Spanish and Italian sovereign debt continue to take the air out of inflated bond yields. And the gut-wrenching crash in European equities has reversed itself a bit in recent days. That's good news.Alas, all is not well in Europe. The big question continues to be: can European economies manage their aggressive austerity plans against a backdrop of lagging growth? And the growth outlook is darkening. Today, France, which found itself at the middle of the week's debt-downgrade and banking panic, reported disappointing growth figures. From the first quarter to the second, the French economy failed to expand at all, held back in large part by a drop in household consumption. For now, French officials are declaring that they'll keep to their deficit-reduction goals.What's worse, the euro-zone economy as a whole is rapidly losing momentum. Industrial production across the euro area fell by 0.7% from May to June. Production dropped in every large euro-zone economy, including a 1.7% decline in France and a 0.8% dip in Germany, which is widely considered the currency area's bulwark against a return to recession. Activity dropped across southern Europe, falling in Italy for a second consecutive month. That's especially bad news for an economy facing an accelerated austerity push.Falling output will reduce the effectiveness of fiscal consolidation, both by negatively impacting revenues and by cutting the denominator in the debt-to-GDP calculation. Disappointing fiscal progress may lead to more market trouble, raising sovereign borrowing costs. Or it might lead governments to push for more aggressive austerity still. Or both. One thing is for sure: a return to euro-zone recession would set the stage for a prolonged crisis environment, through which the survival of the currency area will constantly be in question.