All this corroborates a warning from the European Commission last week, that the adverse effects of tighter fiscal policy will be larger now than normal, given that private borrowing will not increase to offset attempts to reduce public borrowing.
Chris Williamson of research group Markit warns that euro area GDP could fall by 0.5 per cent in the second quarter. And signs are emerging that this is hitting the UK. Purchasing managers reported last week that manufacturers have seen their largest drop in new orders since March 2009. Although next week’s official numbers are expected to show stable output in April, this will be thanks in large part to firms working on a backlog of orders. Andrew Goodwin of Ernst & Young’s Item Club says the euro crisis "is having a very damaging effect on confidence".
But the problem is not confined to the euro area. Purchasing managers say UK exporters are seeing orders from the US and Asia falling. This is consistent with the finding of economists at Barclays Capital that business confidence is falling around the world - a concern highlighted by news last week that US unemployment is rising again.
All this is especially worrying because economists had hoped that UK exports would grow this year to offset the weakness of domestic demand. Such a hope looks increasingly forlorn.
Worse still, there's a danger of a long-lasting depression in the euro area. Southern European economies have been losing competitiveness, relative to Germany, since the late 1990s. Unless Germany accepts higher inflation - and there is little sign of it doing so - restoring that competitiveness will require many years of wage restraint and weak consumer spending. James Nixon at Societe Generale warns that the region faces a "lost decade" comparable to Japan's long depression in the 1990s. With the UK exporting more to each of Spain and Italy than it does to China, this would hold back the UK economy for years.
