Eurozone GDP Growth Slows as Austerity Takes Its Toll

Economic growth in the eurozone slowed sharply in the third quarter as governments' austerity measures aimed at cutting record budget deficits dented the Continent's recovery. With divergence of economic performance growing wider among the member nations, the European Central Bank is likely to find it difficult to set monetary policy.

The 16-nation eurozone's gross domestic product grew a smaller-than-expected 0.4% from the second quarter of 2010, and 1.9% from last year's third quarter, the EU's official statistics agency, Eurostat, said today. In the second quarter, GDP rose 1% -- its fastest pace in four years.

The report also highlighted the increasing differences between the stronger and weaker national economies. The German economy grew 0.7% quarter-to-quarter, after expanding 2.3% in the second quarter. The French economy grew 0.4% quarter-to-quarter, after posting a 0.7% rate in the second quarter.

Countries exporting to Germany benefited from its growth, with the Czech Republic's economy growing 1.1% from the previous quarter, while Hungary expanded 0.8%, and Austria and Slovakia each grew 0.9%.

But for countries whose first priority as eurozone members was to trim huge debts, rather than working to boost their struggling economies, the story was different. Greece was the eurozone's weakest economy, contracting 1.1% quarter-to-quarter and 4.5% year-to-year. Spain was flat, while Portugal grew 0.4% quarter-to-quarter, and Italy expanded by just 0.2%. No figures were available for Ireland.

Those wide divergences in growth rates pose a policy problem for the European Central Bank. Any tightening of credit and the money supply could adversely affect already-struggling nations, but if it keeps interest rates low too long, it risks igniting inflation in the nations that are still growing.