Germany is playing its traditional role as Europe's economic lifeblood, powering the continent to faster-than-expected growth. But looks can deceive.
Beyond Germany and France, much of the 16-nation euro bloc is still in disarray, statistics released Friday by the European Union show.
German gross domestic product increased 2.2 per cent in the second quarter from the previous three-month period, theoretically putting the country on track to expand at an annual pace comparable to booming emerging markets like China and India. France, the euro zone's second-most important economy, grew 0.6 per cent from the quarter before, also providing a crucial boost.
Germany's breathtaking performance helped the euro zone, whose members share a currency, record an overall growth rate of 1 per cent in the quarter, the fastest in four years. The economy of the bigger 27-member European Union expanded at the same pace.
For the first time since Europe's debt problems flared into a full-blown crisis in May, the continent looks on its face to be on better footing than the United States. A stream of disappointing U.S. economic reports pushed the Federal Reserve this week to take steps to prop up a recovery that the central bank acknowledged is turning out to be weaker than expected.
Europe's overall growth rate and Germany's rapid rebound, however, mask weakness in many of the lagging countries that could persist for years.
For example, Spain and its 20-per-cent unemployment rate expanded a less-than-forecast 0.2 per cent in the second quarter and Greece's recession deepened thanks to the pain inflicted by austerity measures that markets demanded.
Moreover, Germany's statistics office said the country's expansion - the fastest since reunification 20 years ago - was driven in large part by exports. With key buyers of German goods steadily slowing down, economists said it seems unlikely the German economy can continue to grow so quickly. And Germany accounted for almost two-thirds of the euro area's growth in the second quarter, according to the European Union's statistics office.
"I don't think we'll see these kinds of numbers any more, considering that the U.S. economy is slowing and so is China," Tuuli McCully, a senior economist in Scotia Capital's international research group, said in an interview. "The export sector is not going to maintain its momentum."
Europe took longer than the U.S. to start recovering from the global downturn, and now the continent seems to be "following behind a little bit" in starting to slow as the global bounce-back shows signs of stress, Ms. McCully noted. "We'll probably see the same slowdown in growth rates in the third quarter that we saw in the U.S. already."
That will make it easier for European Central Bank president Jean-Claude Trichet, who is now coping with both strong and weak economies in one region, to keep emergency-low interest rates in place, in order to cushion the blow from fiscal belt-tightening.
Indeed, the last thing debt-ridden European countries need is yet another source of higher borrowing costs. After the second-quarter growth figures were released, the difference in yield that investors require to hold government bonds from Greece as opposed to benchmark German bonds widened to the most since May 7, according to Bloomberg News. That's a clear a sign that markets are still skeptical about whether countries such as Greece, Spain, Portugal and Ireland will be able to shrink their deficits.
But placating those investors means keeping aggressive budget-cutting plans on track and, consequently, a longer and more grinding climb back to economic health.
"Looking ahead, the peripheral economies should continue to suffer from fiscal tightening and remain in, or return to, recession," Jennifer McKeown of London-based Capital Economics said in a note to clients. "Meanwhile, the German recovery should weaken as global demand slows and its own fiscal consolidation begins next year."