Morning Market Roundup — EU Edition: Here’s What You Need to Know

Posted on May 15, 2012 at 9:09am by Becket Adams

Here’s what’s important in the eurozone right now:
Did EU Avoid Recession? Europe narrowly dodged a bullet Tuesday after the economy of the 17-nation eurozone avoided a recession in the first quarter of the year despite a raging debt crisis that’s raising the specter of the breakup of the currency union.
There was one reason why the eurozone avoided an overall recession — officially defined as two consecutive quarters of negative growth. Germany, Europe’s biggest economy, was behind the better-than-expected performance as strong export figures helped it grow by 0.5 percent.
The figures are subject to change as Eurostat continues to collect figures. Several countries, including Ireland and Slovenia, have yet to release quarterly figures and for Greece there are only year-on-year comparisons.
Merkel Undeterred: Chancellor Angela Merkel is insisting that a heavy state election defeat for her party in Germany‘s most populous region won’t weaken her as she grapples with a deepening European debt crisis.
Merkel also said Monday that she is “very relaxed” about national elections due in late 2013.
On Sunday, Merkel’s conservative Christian Democrats slumped to their worst election result in North Rhine-Westphalia state since World War II, while voters strengthened a regional government that the party had portrayed as irresponsibly spendthrift. The outcome gave new confidence to Germany’s center-left opposition.
But Merkel — insisting the election results were not about her record — said that her “work in Europe is not affected” by what she conceded was “a bitter, painful defeat.”
Austerity vs. Gov’t Spending: New French president Francois Hollande has demanded that the fiscal treaty that brought an uneasy calm to markets by cracking down on overspending be renegotiated to include growth measures. German Chancellor Angela Merkel is cool to the idea. The fate of the eurozone may rest on whether he and Chancellor Merkel can find a compromise.
A senior lawmaker with Merkel’s party said Tuesday that Germany is willing to discuss growth-promoting measures with France – so long as a European budget-discipline pact stands.
Peter Altmaier, chief parliamentary whip of Merkel’s conservative bloc, spoke shortly after new French President Francois Hollande took office. Hollande, who has criticized Germany’s austerity-led crisis management, is to meet Merkel in Berlin later in the day.
Altmaier stressed the importance of sticking to the so-called fiscal compact championed by Merkel. But, he said, “we have an interest in the economy everywhere in the eurozone picking up and growing as it did in Germany in the first quarter.”
Bundesbank Wants Greece Out: The head of Germany’s central bank is warning that there would be no basis for further financial aid to keep Greece afloat if the country backs off agreements with international creditors.
The comments by Bundesbank chief Jens Weidmann came as Greek politicians, deeply divided over the value of austerity and reform measures that creditors demanded in exchange for rescue loans, flounder in efforts to form a new government.
“If Athens doesn’t stand by its word, that is a democratic decision – but that means the basis for further financial aid falls away,” Weidmann was quoted Saturday as telling the German daily Sueddeutsche Zeitung. “The donor countries also have to justify themselves to their population.”
What a Greek Default Could Mean For The U.S.: The short-term financial consequences of Greece defaulting may be limited across the Atlantic. American banks already have sharply reduced their exposure to Greece by more than 40 percent to $5.8 billion, according to the government.
But the concern is that market speculation would then fall on the far larger economies of Spain and Italy. Both are deep in the red and heavily dependent on credit markets to stay afloat. And their debts are held by Europe’s big banks.
Each round of bad news from Europe raises uncertainty. No one knows how a Greek exit from the euro would work and the financial swings have added to the stress on Europe’s economy. And every time stocks plunge and the borrowing costs for troubled countries rise, businesses and consumers grow more cautious. This makes them more reluctant to expand companies or buy more property.
Economists call this threat contagion. Scared investors sell off their assets in Europe’s most troubled economies and the governments struggle to access credit while falling into deeper recession. A crisis as bad as Greece’s in a bigger nation would have severe global implications.
The Associated Press contributed to this report.