America's economic ills spread to Europe

Gross domestic product in the 15 countries that use the euro currency — which excludes Britain — grew by 2.2 percent on an annual basis in the first quarter of 2008, according to Eurostat. But that may be the last bit of good news for a while.

"The big news is that the euro zone itself may contract in the second quarter," said Barcelona-based economist Edward Hughes.

The crisis has already claimed a casualty in Spain with the collapse of the big construction firm Matinsa-Fadesa under 5 billion euros in debt. The firm suffered the effects of higher interest rates and tighter lending conditions by banks spooked, though not directly impacted, by the U.S. subprime mortgage.

Bad news keeps rolling out of Germany, Europe's biggest economy. Exports were down 3.2 percent in May, the biggest drop in more than three years. The private research firm ZEW reported this week that German investor confidence has plummeted to its lowest level since it launched the index in 1991. And growth appears to have slowed dramatically in the second quarter — to just 0,2 percent of GDP, according to the DIW think tank.

Still, many economists believe that Germany may still escape a big hit, following healthy 1.5 percent first quarter growth.

That may not be enough to improve the picture over all. Bank of America forecasts stagnation in the euro zone for the last three quarters.

But at Barclays Capital, "we haven't penciled in a doomsday scenario in terms of economic growth," said Frankfurt-based economist Thorsten Polleit.

Barclays forecasts a slight 0.1 percent contraction in the second quarter, followed by 0.3 percent growth in each of the third and fourth quarters, Polleit said. For the year, Barclays growth forecast is 1.6 percent in 2008 and 2 percent in 2009.

"Inflation is a societal evil. It starts biting into consumer spending," Polleit said. While that's the picture in Europe and North America, Polleit notes that what is happening is a shift in spending power toward countries exporting commodities.

"It is always the same story. We are happy with rising prices of goods we already own," said Polleit. "We hate rising prices for goods we would like to buy. ... We don't appreciated it if others are getting better off while we are getting less well off."

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