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Germany, France haul euro zone out of recession

France's President Francois Hollande (R) and German Chancellor Angela Merkel attend a joint news conference at the Elysee Palace in Paris, M
France's President Francois Hollande (R) and German Chancellor Angela Merkel attend a joint news conference at the Elysee Palace in Paris, M

By Martin Santa

BRUSSELS (Reuters) - The economies of Germany and France grew faster than expected in the second quarter, bettering a widely heralded expansion in the United States and pulling the euro zone out of a 1-1/2 year-long recession.

The increased pace was primarily driven by renewed business and consumer spending in the 17-country bloc's two largest economies. The euro zone economy was fragile overall, however, with some countries, notably Spain and Italy, still struggling.

European Economic and Monetary Affairs Commissioner Olli Rehn said the data released on Wednesday showing 0.3 percent euro zone growth for the three months to June meant a nascent recovery was on a more solid footing.

But he said there was no room for complacency and that maintaining pace depended on "avoid(ing) new political crises and detrimental market turbulence".

The euro zone has been in a debt crisis for more than 3-1/2 years.

Germany, the bloc's economic powerhouse, grew 0.7 percent, its largest expansion in more than a year, thanks largely to domestic private and public consumption.

France's economy expanded 0.5 percent, pulling out of a shallow recession to post its strongest quarterly growth since early 2011. The turnaround was driven by consumer spending and industrial output, although investment dropped again.

French and German growth compared with a second-quarter expansion of around 0.4 percent in the United States, considered one of the bright spots of the global recovery.

Improvement was noticeable elsewhere in the bloc. Bailed-out Portugal's GDP leapt 1.1 percent in the quarter, its strongest in almost three years, due to higher exports and the easing of a previous investment slump.

Austria and Finland also saw improved growth.

But recession continued in the Netherlands - an otherwise core euro zone economy - as well in the debt-laden periphery.

Cyprus's economy contracted by 1.4 percent in the second quarter. It was the first comprehensive snapshot of how the island fared from the upheaval accompanying an international bailout in March, conditional on the closure of a major bank and heavy losses on big deposits in a second lender.

"The return to modest rates of economic growth in the euro zone as a whole won't address the deep-seated economic and fiscal problems of the peripheral countries," researchers at Capital Economics wrote in a note.

Many analysts and economists believe the pace of growth currently being seen will ease in coming quarters and that a return to healthy sustained growth rates is unlikely to arrive before 2015.

UNEVEN, BUMPY RECOVERY AHEAD

The problem for the euro zone, as it has been for some years, is the indebted south.

The International Monetary Fund said earlier this month that Spain's reform program, fiscal consolidation and crackdown on external imbalances were bearing fruit, but that urgent action was needed to create jobs and stimulate growth.

Spain reported last month that its economy shrank 0.1 percent in the second quarter, an improvement but still a contraction.

Greece is in its sixth year of a recession that looks likely to cut the economy's overall value by a quarter by the end of the year.

The scope and form of the austerity drive in the European Union is now changing, however.

Policymakers still say adjustments in excessive deficits and high debt are essential. But they now emphasize that any action taken must not choke growth and must help create jobs.

European Central Bank President Mario Draghi said this month that labor market conditions remained weak, though he expected the bloc to benefit from a gradual recovery in global demand.

"Overall, euro area economic activity should stabilize and recover at a slow pace. The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said after the ECB's rate meeting on August 1.

BEYOND THE EURO ZONE

In emerging Europe, the Czech Republic exited recession in the second quarter while the European Union's other bigger eastern economies improved, although there was little sign of the optimism among consumers needed to drive a stronger upturn.

Headline numbers showed the Czechs firmly back in positive territory with growth of 0.7 percent compared with the first quarter. Hungary grew 0.1 percent and Poland 0.4 percent.

The pickup in emerging Europe is expected largely to have come from improvement in Germany and other larger euro zone countries to which the region's cheap and flexible businesses send much of their exports.

(Additional reporting by Reuters bureaus. Graphics by Vincent Flasseur; Editing by Jeremy Gaunt and Catherine Evans)

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