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Europe Facing Its Own “Fiscal Cliff” Moment

As the American political establishment turns its thoughts away from the election and back to the business of governing, the fiscal cliff looms large in the weeks ahead. But Washington’s fiscal cliff isn’t the only precipice on the horizon: The news from Europe is getting worse, and the German economy continues to sputter. The Financial Post reports:

The eurozone relies heavily on Germany, its largest economy, to generate growth. Business activity there shrank at faster pace last month and new data show industrial orders in September plummeted at a far faster rate than expected.

PMI compiler Markit said its latest survey was consistent with the eurozone economy shrinking at a quarterly rate of around 0.5%.

If the PMIs fail to improve for November and December, the eurozone economy could easily face a hefty contraction in the fourth quarter rather than the stagnation projected by economists polled by Reuters two weeks ago.

While ECB liquidity has managed to pull Europe just short of swift and sudden catastrophe, the weaknesses in the real economy continue to undermine the foundations of Europe’s economic structure.

Economic trouble in Europe means trouble for the United States as well, and the troubles don’t stop there: European malaise will increasingly pose foreign policy problems in the Middle East. The knock-on effects of another round of European recession on Turkey and Egypt, for example, will make an already deteriorating situation worse.

The next couple of weeks will tell us more. This story bears watching.

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