Report: European economy has all but stalled

LONDON - Europe appears headed for a recession - if it isn't in one already.

Economic growth has all but stopped in Europe, statistics showed Tuesday. The stall comes just when Italy, Greece and other nations need growth to help them wriggle out of the chokehold of debt.

The European Union economy grew a paltry 0.2 percent in July, August and September compared with the three months before, the EU statistics agency said. That is the same growth rate as the previous quarter, and far slower than the 0.7 percent before that.

And the picture is probably even worse. The statistics did not include Italy and Greece, the two countries in the most debt trouble. And their debt crisis only got worse in October, the month after this snapshot was taken.

Besides lowering standards of living and hurting the job market in Europe, a recession would be bad news for the U.S., which sells 20 percent of its exports to Europe, and for Asia.

Taken as a whole, Europe also has the largest economy in the world, producing $16.2 trillion in goods and services last year. The United States produced $14.5 trillion last year, China $5.9 trillion.

So economic sickness in Europe has the ability to slow growth around the world.

"People are uncertain," said Ferdinand Fichtner of the German Economic Institute DIW. "That is poison for growth."

Fear that the economic slowdown will make the debt crisis worse were evident in financial markets Tuesday. Borrowing costs rose for many nations, an indication that investors are nervous about lending to them.

In Italy, the yield on the closely watched 10-year bond rose back above 7 percent, even though a new government has replaced the dysfunctional regime of Silvio Berlusconi. The yield rose above 7 percent for the first time last week and helped drive Berlusconi from office. And yields of 7 percent forced Greece and other European countries to seek bailouts.

The yield was at 7.04 percent late Tuesday, up 0.46 percentage points from the day before. Spain was at 6.29 percent, up 0.22 percentage points, and France was at 3.66 percent, up 0.23 percentage points.

Higher bond yields triggered by slow - or no - growth create a vicious cycle that is difficult for a country to stop. When the yield goes up on its debt, a country must spend more money paying interest. If the economy isn't growing, then the deficit grows, and countries have to borrow even more. Cut services to close the gap, and the economy can slow even more.

The two largest economies in Europe, Germany and France, kept growing from July through September, but not much faster than their neighbors - 0.5 percent in Germany and 0.4 percent in France.

What happens in those countries matters in the rest of Europe. When the Germany economy booms, Germans are more likely to help, say, the Italian economy by buying Italian cars, indulging in an Italian suit or booking a vacation to an Italian villa.

The Netherlands, traditionally a competitive economy, unexpectedly saw its economy shrink in the third quarter. And countries across Europe are at risk of slowing as the debt crisis spreads to other countries and looms over all of them.

"The uncertainty caused by the sovereign debt crisis is lying like mildew upon the eurozone economy," said Christope Weil, an economist at Commerzbank, referring to the 17 nations in the EU that use the euro as their currency.

The European Commission warned recently that unemployment in that 17-nation club, already 10.2 percent, would remain high for the foreseeable future. Unemployment in the United States is 9 percent.

The 0.2 percent growth in the EU compares with 0.6 percent growth in the United States in the third quarter compared with the quarter before - not exactly sizzling, but at least better. Japan, which is making up for lost economic output after the earthquake and tsunami last March, grew 1.5 percent.

U.S. policymakers frequently cite Europe's crisis as one of the top threats facing the American economy.

"Unfortunately, we can't disassociate ourselves from Europe. The things that are happening there do affect us," Fed Chairman Ben Bernanke said earlier this month. "I hope very much that the Europeans will find a set of solutions that will allow markets to calm down and take off some of the headwinds from the U.S. economy."

Paul Dales, senior U.S. economist at Capital Economics, estimates that a recession in Europe would shave about half a percentage point off U.S. economic growth in 2012, cutting it to 1.5 percent. Others have similar estimates.

A survey last week by the Federal Reserve showed that European banks with operations in the United States are tightening lending. Europe's troubles also hurt China, where products are assembled and shipped to European countries.

American banks have not lent much money to other banks or governments in Europe's most troubled countries. That limits the risk if European banks take a hit because they own bonds issued by countries that can't pay them off.

Dales said U.S. banks had much greater exposure to Asia during a financial crisis there in the late 1990s than they now do to Europe. And the U.S. economy "sailed through" the Asia crisis, he said.

The U.S. could be hurt, though, by a freeze in global lending, similar to what happened after Lehman Brothers investment bank collapsed in 2008. Banks were too worried to lend to each other, increasing borrowing costs for everyone.

AP Economics Writer Christopher S. Rugaber in Washington and Associated Press writer Melissa Eddy in Berlin contributed to this report.