Europe's economy edges closer to recession Europe's economy edges closer to recession - World business Europe's south drags economy closer to recession Eurozone's economy contracted 0.3% in the final quarter of 2011 as the debt crisis hit countries hard By Robin Emmott and Daniel Flynn BRUSSELS/PARIS - The euro zone economy shrank at the end of 2011 and will flirt with a mild recession under the weight of the sovereign debt crisis, but strength in France and resilience in Germany may keep it above water. The drag is coming from a stricken, debt-laden south, epitomized by a slumping Italy. Economic output in the 17-nation currency area fell 0.3 percent in the fourth quarter from the third, as expected by economists in a Reuters poll, the European Union's statistics office Eurostat said on Wednesday. The slump was the first contraction since the second quarter of 2009 at the height of the global financial crisis, when output shrunk 0.2 percent. The 27-nation EU economy also shrunk 0.3 percent in the October-to-December period. But economic progress was very diversified. "We seeing very wide regional divergences and this fourth quarter data doesn't really help us see where the economy is going," said Greg Fuzesi, a European economist at JP Morgan. "The fundamentals make you think the economy will stay in recession but business surveys suggest otherwise," he added. Underscoring just how poisonous the debt crisis has been for businesses and the economy, gross domestic product grew just 0.7 percent in the fourth quarter compared to a year earlier after posting 2.4 percent growth at the start of 2011, when Europe was recovering strongly from the 2008/2009 global financial crisis. Despite signs of stabilization in January, helped by calmer capital markets and stronger growth in the United States, analysts in a Reuters poll predict the euro zone's economy will still shrink 0.4 percent throughout 2012, returning to growth in 2013. That is in line with the International Monetary Fund forecast of a 0.5 percent contraction in 2012. Growing apart Even a mild recession masks the gap between the wealthy nations of northern Europe and those of the poorer, less productive south that lived beyond their means and now face years of austerity to cut debts and reform their economies. Germany's economy, the biggest in the euro zone, contracted slightly in the fourth quarter, but both it and France, which eked out anemic growth, performed better than forecast. German gross domestic product contracted 0.2 percent, a slowdown from upwardly revised 0.6 percent growth in the July-September period, data showed on Wednesday. France fared better, growing by a stronger-than-expected 0.2 percent in the fourth quarter from the previous three months as companies invested more and consumers continued to spend. German ZEW think tank's monthly poll of economic sentiment jumped for the third month in a row on Tuesday, to its highest level since April 2011, reinforcing signs that Europe's largest economy is returning to growth. "The first economic contraction since the end of the recession turned out to be weaker than expected, confirming that the German economy only took a growth pause and is not approaching a new recession," ING's Carsten Brzeski said. France's economy also beat expectations that it would shrink by 0.1 percent, growing by 0.2 percent, and economists said it too might avoid recession - defined as two consecutive quarters of negative growth. BNP Paribas , France's biggest listed bank, sounded an upbeat note at odds with the tone of many European rivals, predicting the euro zone debt crisis was stabilizing. The beginning of the year has been quite strong in investment banking ... (We see) some kind of stabilization of the euro zone situation," Chief Executive Jean-Laurent Bonnafe said in an interview with Reuters Insider TV, after reporting fourth-quarter results that were not as weak as expected. Late last year, European Central Bank President Mario Draghi forecast a mild recession for the currency bloc as a whole. His latest assessment, given at a news conference following a monetary policy meeting last week, was that there was evidence of "a stabilization of economic activity at a low level." Finland posted quarterly growth of 0.7 percent. The exception in the northern half of the currency bloc was the Netherlands which subsided into recession, shrinking by 0.7 percent, following a third-quarter contraction of 0.4 percent. No southern comfort But further south, there was little solace for European economies that the European Commission warned this week were in need of reform and put them on a blacklist with pressure to act or face sanctions. Italy's economy contracted a steeper than expected 0.7 percent in the final part of last year, throwing the country into a slump expected to last for much of 2012 and joining Belgium, Portugal and Greece in recession. The International Monetary Fund forecasts a full-year contraction of 2.2 percent in 2012, while the Bank of Italy sees a more modest decline of 1.2-1.5 percent. The government still has an official projections of -0.4 percent, considered unrealistic by all independent forecasters. With wrangling over a second Greek bailout still unresolved, data on Tuesday showed Greece's economy shrank by a stunning 7 percent year-on-year in the fourth quarter, much worse than a Q3 decline of 5 percent. The austerity measures demanded by its lenders are likely to make things even worse. The latest figures also make it that much harder to reach its debt targets, calling into question the wisdom of cutting so deeply. Euro zone finance ministers have dropped plans for a special face-to-face meeting on Wednesday on Greece's new international bailout, saying political party chiefs in Athens had failed to provide the required commitment to reform. Portugal, which many analysts expect to require bailing out for a second time too, suffered a 1.3 percent quarterly contraction in GDP, more than double the previous quarter's 0.6 fall.