European economy faces fallout from financial crisis

The European economy will suffer collateral damage from the crisis roiling the financial sector, although the extent of the fallout remains to be seen, ministers and analysts warned on Wednesday. "Volatile equity markets, the general climate of uncertainty and some potential further tightening of lending standards by banks could weigh on eurozone growth," predicted Bank of America economist Holger Schmieding.
Even before the latest shockwaves to shake the financial sector, the European economy was struggling with a sharp slowdown in the face of record oil prices, a strong euro and limp global economic activity. Last week, the European Commission estimated that Europe was teetering on the brink of a technical recession, which economists define as two consecutive quarters of contraction.
After the 15-nation eurozone economy contracted 0.2 percent in the second quarter, the European Union's executive arm forecast that it would be at a staandstill in the third quarter "So far, we consider it more likely that the eurozone will stagnate rather than shrink substantially. But the risk of a genuine recession has risen," Bank of America's Schmieding said.
While not expecting a "huge impact" from the crisis, Luxembourg Finance Minister Jean-Claude Juncker said "I don't think the events we are witnessing are helpful for the general growth situation, given the fact that confidence is lacking." "I'm trying not to give reason for panic," said Juncker, who speaks on behalf of eurozone finance ministers as chairman of their regular meetings.
Economist Howard Archer at consultants Global Insight warned that the financial crisis "counters the recent positive developments for the region of sharply lower oil prices and the euro's retreat from its July peak levels." He warned that the financial sector crisis "will weigh down significantly on already very fragile business and consumer confidence." "It is also likely to deepen and extend the credit crunch, thereby making borrowing more difficult and costly for businesses and consumers," he added.