U.S. Economic Crisis Spilling Over to Europe

The Wall Street Journal said yesterday that the effects of the U.S. economic shock have rippled throughout Europe, pulling down the global economy.

In a feature on the state of the world economy, the daily said the European economy is taking a hit, a phenomenon going against the earlier prediction that it would remain a safe haven from U.S. turmoil.

To support its prediction, the Journal cited Spain’s largest business failure -- the bankruptcy of the construction group Martinsa-Fadesa; the record strength of the euro against the greenback; and the lowest investor sentiment in Germany, Europe’s biggest economy, since the 1990s.

Europe is suffering from rising energy and raw material prices and the strong euro, which is hampering corporate activities. Unemployment is also rising, as blue chip German companies such as Siemens and Henkel have announced huge layoffs.

Martinsa-Fadesa’s failure could signal the imminent burst of the continent’s real estate bubble, putting European market watchers on alert. Some blame the ripple effect from the trouble facing U.S. mortgage behemoths Freddie Mac and Fannie Mae.

Many investors apparently no longer believe in decoupling, as both European and Asian stock markets fluctuate upon news from the United States.

Despite U.S. President George W. Bush’s urge for swift congressional action to stabilize the mortgage sector, market uncertainty has not calmed down.

Michael Hume, European economist at Lehman Brothers, said all sources of growth are in trouble and where recovery will come from is unclear. He predicted a 40-percent chance of outright recession in the euro currency area this year.

lightee@donga.com