German economy said in recession, drags down Europe

BERLIN -- Europe moved a step closer to recession Thursday with the news that the German economy unexpectedly shrank in the third quarter, as consumers and firms reined in spending even before the full impact of the Sept. 11 attacks was felt.

The total value of goods and services produced in Germany in the three months through September slipped 0.1 percent from the previous quarter, the first decline in more than two years, the government statistics office said.

Economists expect a further contraction across Europe in the closing quarter of this year, led by Germany, which accounts for about a third of economic activity in the 12 nations using the euro. A recession is commonly defined as two consecutive quarters of negative growth.

"Germany is of course the weakest link," said Claudia Henkel, an economist at Dresdner Bank in Frankfurt. With countries such as France still faring a little better, "Euroland may just squeak past a recession if there is only a stagnation in the third quarter," she said.

The German economy has slowed dramatically since expanding by a healthy 3 percent in 2000. Growth was just only 0.4 percent in the first quarter and flat in the second -- a performance economists had expected to continue in the July-September period.

The German government, after claiming much of the credit for that expansion, has blamed the weakness in the United States for the downturn and for forcing it to abandon a central pledge to cut unemployment.

Chancellor Gerhard Schroeder had promised to cut the number of people out of work to 3.5 million in time for national elections next fall, but big firms such as Siemens and truck maker MAN have announced thousands of cuts.

Finance Minister Hans Eichel conceded Wednesday that unemployment will now likely rise 9 percent this winter from October.

Despite the slowdown, the government continues to reject calls from industry and the opposition for deeper tax cuts and sweeping reforms of labor markets. Schroeder argues that Germans don't want "American conditions," where firms are much freer to hire and fire.

"The labor laws here provide a good enough framework," Economy Minister Werner Mueller told executives from German engineering companies Thursday.

But other major European economies are weathering the problems better, with France, Britain and Italy all growing more quickly.

"We've got one foot in recession," said Ulrich Ramm, chief economist of Commerzbank, forecasting a further 0.25 percent decline in the fourth quarter for Germany, and calling for the government to cut red tape and consider easing taxes.