European economy feels America's pain

MILAN, Italy — It took a few months. But the economic woes touched off by soaring oil prices and the subprime mortgage crisis in the United States are finally engulfing Europe.

While each country has written its own recipe for what appears to be a looming slowdown, they all have one key ingredient in common: "Inflation, inflation, inflation," said economist Gilles Moec of the Bank of America in London.

Pinched by higher prices, consumers aren't spending — and polls find confidence levels are falling in most of Europe's big economies.

Marie-Charlotte Robin, 23, a communications student who drives every day through Paris for her summer internship, says she has to devote more and more of her budget to gasoline. Recently, she has spent about 70 euros ($110) a week at the pump.

"I don't even fill up my whole tank anymore because the price makes me sick to my stomach," Robin said, while taking a lunch break on a park bench on a street just off the Champs-Elysee.

Inflation could well be the bugbear that defines what might otherwise have been a normal, cyclical slowdown after two or three years of strong growth in Europe.

Unusually, it is food and oil prices that have risen without driving up core inflation. But many worry it is just a matter of time before prices for other goods begin rising as well.

"Overall, inflation is at 4 percent, twice the target of the European Central Bank," said Marco Annunziata, chief economist of UniCredit Markets and Investment Banking in London.

"If you look at core inflation — if you ignore the prices of food and energy — it is less than 2 percent. That shows the prices of everything else except food and energy are quite stable. The question is: How long can it last?"

A stronger euro had buffered Europeans somewhat from the early rise in oil prices, since crude is priced in dollars, and for a while their economies rolled on. But soaring energy costs are starting to bite, and there is growing pessimism about the impact here from the economic troubles in the U.S. — a top export market.

Kabir Siyar, who owns a mobile phone and electronics business, said business has slowed at his store on Hauptwache square, one of the busiest shopping areas in Frankfurt, Germany.

"For the past year or year-and-a-half, for things that cost as little as five euros ($7.90) people are asking if they can have it for three euros ($4.75) instead. You never used to see haggling," he said. "People used to just hand over the money; now they're trying to get a better price."

The dynamics of slowdown vary greatly from country to country, creating a complex scenario that is exacerbating worries about how bad it will get — and making it harder for the European Central Bank to conduct its one-size-fits-all interest rate policy. Stressing the need to fight inflation, the bank raised rates earlier this month despite fears that might weigh on growth.

Spain, Ireland and Britain suffer from burst housing bubbles like the one in the United States. Germany's export motor, running strongly for several years, is suddenly sputtering. Italy, Europe's perennial underperformer, limps along, burdened by chronic structural problems.

Denmark is already in a technical recession — two consecutive quarters of decreasing economic output. According to many economists, the list of suspects for second-quarter contraction is growing: Spain, Italy and Ireland and possibly France and even Germany.

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