Eurozone economy close to stall speed amid debt crisis

Growth in the eurozone is rapidly slowing, according to the latest official data from the Eurostat agency. The economy of the 17-nation bloc grew by just 0.2 per cent between July and September. The strongest growth came from Germany, which expanded by 0.5 per cent and the French economy which grew by 0.4 per cent over the three months. Finland and Austria both expanded by 0.3 per cent, while Spain and Belgium were stagnant.

Although the total eurozone area registered growth of 1.4 per cent on the same period in 2010, policymakers and independent economists expect growth to turn negative over the final three months of 2011. Jonathan Loynes, of Capital Economics, said of the latest Eurostat figures: "The key point is that this is all history. Forward-looking indicators suggest that the eurozone economy is likely to drop back into recession in the fourth quarter and beyond."

The new president of the European Central Bank, Mario Draghi, said at his first press conference earlier this month that the eurozone will enter a "mild recession" before the end of this year.

Yesterday also saw confidence among investors in the safety of sovereign bonds of eurozone nations fall sharply again. Italian 10-year bond yields crept up over the danger level of 7 per cent. Investors were unnerved by reports of difficulties faced by the new Prime Minister, Mario Monti, in forming a governing coalition. The leader of the right-wing Northern League party, Umberto Bossi, was reported to have refused to attend any meetings with Mr Monti. According to the Italian newspaper La Repubblica, Mr Bossi said he would not support any newly named government in a confidence vote and would only back measures passed on a "case-by-case basis".

Elsewhere, the Spanish government managed to sell €2.6bn (£2.2bn) of 12-month debt yesterday, but Madrid had to pay an interest rate of 5 per cent to do so, up from 3.6 per cent at the last such auction. The Socialist government of Jose Luis Rodriguez Zapatero is expected to be decisively defeated by the centre-right People's Party (PP) in national elections on Sunday. The PP is committed to new austerity measures in Spain. Its leader, Mariano Rajoy, has warned he will "take the scissors to everything except public pensions, health and education".

Meanwhile, the spread of French10-year bonds over German Bunds reached a euro-era record high of 1.726 percentage points in a sign of how financial contagion is spreading from the troubled eurozone periphery to the core countries of the single currency.

Some European policymakers are seeking to curb the volatility of the capital markets. The European internal market commissioner, Michael Barnier, yesterday unveiled plans to tighten the rules on credit rating agencies, which policymakers blame for exacerbating market panics over the past year.

Mr Barnier said: "I have also been surprised by the timings of some sovereign ratings – for example, ratings announced in the middle of negotiations on an international aid programme for a country. We can't let ratings increase market volatility further."