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Europe's Short-Term Economic Fixes Can't Solve Long-Term Problems

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MELISSA BLOCK, HOST:

If you want to feel good about the American economy just look to Europe. Economic growth there is slow, unemployment is high. And new data this week suggests the continent maybe about to enter its third recession in six years. NPR's Ari Shapiro reports from London on what's going wrong and why.

ARI SHAPIRO, BYLINE: You could say Europe's recovery from the 2008 financial collapse has been uneven. Or you could say there's never really been a recovery.

That's the view of Jonathan Portes. He directs the National Institute for Economic and Social Research in London.

JONATHAN PORTES: I think describing it as a recovery is actually wrong. What we're seeing now is that that prolonged period of stagnation seems, if anything, to be getting somewhat worse with Germany now showing signs of falling back into - possibly into recession.

SHAPIRO: Germany is key to this equation. For the last several years, Germany has been Europe's straight-A student. While unemployment in Spain is 25 percent, German unemployment is only 5 percent. Now, Germany's grades are slipping. Ferdinand Fichtner is head of forecasting and economic policy at the think tank DIW Berlin.

FERDINAND FICHTNER: We've seen orders dropping. We've seen production dropping in August. And in particular, but it's probably the most important thing which is making people nervous right now, is that sentiment indicators have declined.

SHAPIRO: Sentiment indicators - that's basically a measure of the mood in the business community. And right now, the mood is not good. The International Monetary Fund lowered its forecast for global economic growth this week.

FICHTNER: What we're seeing now is probably kind of a correction of an overly optimistic outlook we had.

SHAPIRO: Europe's economy already shrank in the second quarter. Now it looks like it might shrink in the third quarter, too. That's generally considered a recession. All this news made for a bad week in the European stock market.

German Chancellor Angela Merkel addressed parliament in Berlin, speaking here through an interpreter.

CHANCELLOR ANGELA MERKEL: (Through translator) The crisis is not yet permanently and sustainably over because its root in regard to creating the European economic and monetary union, as well as in regard to the situation of individual member states, is not yet eliminated.

SHAPIRO: In other words, Europe has been papering over its economic problems with short-term fixes rather than long-term solutions. So what are the long-term solutions? Well, nobody agrees.

URI DADUSH: The policymakers are clearly not aligned in Europe.

SHAPIRO: Uri Dadush of Carnegie Europe says this is a familiar divide. On the one hand, the head of Europe's Central Bank believes in stimulus spending - giving countries an injection of money. On the other hand, German Chancellor Merkel believes in austerity and deficit reduction.

DADUSH: It is a very deep difference. I would call it almost an ideological split.

SHAPIRO: And that standoff may be as big a problem as the underlying economic issues, says Jonathan Portes in London.

PORTES: I think we should be very worried because we still have this impasse which is effectively a political one as much as an economic one.

SHAPIRO: That's not to say the situation is hopeless. In Berlin, Ferdinand Fichtner says Europe's salvation may lie on the other side of the Atlantic.

FICHTNER: There's hope that the relatively solid growth we've seen in the U.S. over recent quarters and the relatively good outlook many people have for the U.S. economy - that this could contribute to the stabilization of the weakness we're seeing in the Euro area and in Germany, in particular.

SHAPIRO: Before the Great Recession, American consumption helped drive the global economy. In Europe right now, many people are hoping a growing American economy today will have the same effect. Ari Shapiro, NPR News, London. Transcript provided by NPR, Copyright NPR.

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