And with some justification, for China and the two Asian “tigers” share some alluring characteristics like:

• A highly competitive and innovative manufacturing industry.
• Excellent government and workforce discipline.
• Modest fiscal and monetary stimulus (or, like China, they started from a position of budget surplus).
• And an export orientation that seems likely to benefit quickly as order is restored in the global trading economy.

But there’s another country that shares those characteristics. It’s nowhere near East Asia. But investors can expect this particular economy to also bounce back from this recession with considerable vigor.

I’m talking about the center of supposedly sclerotic Old Europe itself: Germany.

Germany lacks the huge financial sector that has been the bane of the United States and British economies, but it has manufacturing industry that is the envy of the world. Its balance of payments surplus was $205.8 billion in the 12 months through April, and is expected to be 4.4% of gross domestic product (GDP) for all of 2009.

The German government resisted the urge to splurge on “stimulus” packages, and consequently is expected to run a budget deficit of only 4.4% of GDP in 2009 – a ratio that’s far smaller than those of other “advanced” economies, and one that should be easy to finance. Furthermore, the European Central Bank (ECB) has been the most conservative of all major central banks outside Brazil, and German Chancellor Angela Merkel has indicated pretty strongly that it had better stay that way, as she is worried about inflation.

German labor discipline is world-famous, partly because of its sophisticated system of “mitbestimmung” (co-determination) between industry and labor unions. Thus, Germany loses only four days to strikes per 1,000 employees in an average year, an average that’s well below the same statistic for each of its European neighbors. Skill levels are also excellent, because of the superior German education system, much of which is run in partnership with industry.

Because of its more conservative fiscal stance – with less stimulus – Germany has suffered through a much-deeper recession than many other countries, with first-quarter GDP down 6.9% from the previous year.

By comparison, economic output declined 2.5% in the United States and 4.2% in Korea, but 8.8% in Japan and 10.2% in Taiwan.  However, manufacturing orders stabilized in April and it seems likely that Germany will experience a return to growth in the second half of 2009. The ZEW indicator of German economic sentiment for June came in at 44.8 – up more than 13 points from the previous month, and a three-year high. When Germany starts to recover, its economic rebound is likely to be healthy, without resurgent inflation or bond market turmoil, because of Germany’s cautious fiscal and monetary policies.

What to buy? Well, for a start there’s the German exchange-traded fund (ETF), the iShares MSCI Germany Index (NYSE:EWG). At $489 million, it’s surprisingly small, but it has a Price/Earnings (P/E) ratio of 12 and a yield of 6.4%, meaning it provides shareholders with a decent income. It also provides a much-broader exposure to the German market than do the American Depository Receipt (ADR) shares, which relate only to very large companies, and not to the highly successful “mittelstand” medium-sized enterprises.

There are eight German companies whose ADRs have a sponsored full listing on the New York Stock Exchange (several others have moved to the Pink Sheets recently because of the costs of Sarbanes-Oxley compliance). Of these, Infineon Technologies AG (OTC ADR: IFNNY), a semiconductor manufacturer, is making a loss, while Qimonda AG (OTC ADR: QMNDQ), a maker of computer memory devices, is in bankruptcy.
That leaves six possible profit plays:

• Allianz SE: (NYSE ADR: AZ): This huge insurance company sold its shares in Dresdner Bank AG and is now a shareholder in Commerzbank AG (OTC ADR: CRZBY). Allianz lost money in 2008 because of investment losses, but is trading on only nine times projected 2009 earnings, with a 5% dividend yield.

• Daimler AG (NYSE ADR: DAI): A major automaker, and producer of the upscale Mercedes Benz brand (including the fashionable “Smart” small car), Daimler is now thankfully devoid of Chrysler LLCinvolvement. Daimler gratuitously tossed away a considerable amount of shareholder value with two foolish diversifications – into aerospace in the 1980s and into Chrysler in the 1990s. If management can keep its eyes on the road (stay on the black stuff between the trees), this stock could be quite attractive. Daimler’s shares are trading at 20 times recession-year earnings. The dividend yield is only 1.7%, but overall there’s a lot of upside in an economic recovery.

• Deutsche Bank AG (NYSE ADR: DB): This is Germany’s premier bank and investment bank, but it is currently losing money and the stock yields only 1%. For a play on a German financial sector recovery, I prefer Allianz.

• Deutsche Telekom AG (NYSE ADR: DT): Germany’s traditional fixed-line telephone service, Deutsche Telekom also has mobile-phone operations and has increased its revenue by also offering high-speed Internet access. Currently operating at a loss, DT also cut its dividend. Avoid – there are better telecom plays out there.

• SAP AG (NYSE ADR: SAP):  A globally known provider of so-called “enterprise resource planning” (ERP) software, SAP shares have a dividend yield of only 1.2%, and are trading at 19 times prospective earnings. The stock looks a bit pricey to me: I like the sector, but not SAP’s bureaucracy-friendly product line.

• Siemens AG (NYSE ADR: SI): With its wide array of product offerings, Siemens is operationally akin to General Electric Co. (NYSE: GE). Indeed, with  heavy-equipment offerings that range from locomotives to electric power plants, Siemens is selling the kinds of products that are likely to benefit from heavy “stimulus” spending worldwide. The company has recovered from losses in 2006. But the shares are trading at only 11 times estimated earnings for the 12 months that end in September. That low valuation, coupled with a nice dividend yield of 2.9%, makes the stock appear fairly attractive.

Source: Germany: Emerging Market Profit Potential, With (Only) Developed Market Risk

But there’s now another problem looming – one that could ultimately weigh down the global financial system.

The problem: Europe’s banks.

As economies slow in other parts of the world, rising joblessness and plunging housing prices and escalating loan losses are putting banks under pressure. That’s especially true in Europe, where consumers and companies are continuing to run into trouble.

Royal Bank of Scotland PLC (NYSE ADR: RBS), now 70% state-owned, fell to a loss in the first quarter and wrote down $3.17 billion in risky assets after its bad debts quadrupled to $4.37 billion.

Bank executives “[expect] a slowdown in financial-market activity compared with the very buoyant conditions seen in Q1,” Chief Executive Officer Stephen Hester told Reuters.

In Germany, Commerzbank AG (OTC ADR: CRZBY) had to take a $1.61 billion charge from its investment bank and a $72.38 million charge from commercial real estate initiatives, resulting in a $1.2 billion loss for the quarter.

In late December, the Institute of International Finance released its global economic outlook for 2009, and estimated that banks around the world had collectively lost nearly $1 trillion – $678 billion from U.S. banks and $300 billion from their European counterparts.

That was in December. We know it got worse – a lot worse – for U.S. banks after that point. Thanks to a mix that included lots of government bailout and an injection of new capital from investors, U.S. banks have experienced an improvement in their outlook.

Indeed, U.S. Federal Researve Chairman Ben S. Bernanke stated that the banks tested are all solvent and the results should provide “considerable comfort about the health of the banking system.”

But in the five months since that Institute of International Finance report was issued, it’s  likely that European banks have experienced a major decline in their fortunes.

Last week’s release of the bank stress tests results removed significant uncertainty about the U.S. banks, since it created a blueprint of what the troubled institutions needed to do to stabilize their finances. Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have announced plans to raise an aggregate $15 billion in capital. Bank of America Corp. (NYSE: BAC) plans to sell assets and issue more common stock after being told by the federal government that it must raise $33.9 billion to adequately guard against “more adverse” economic conditions.

Bank of America was one of 10 banks told by the government to raise more capital following the so-called stress test. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo, which had the second greatest capital need.
Are we destined to see this all play out now in Europe?

Market Matters

Shifting back to autos, General Motors Corp. (NYSE: GM) lost $6 billion in the first quarter and is shopping Saturn to Renault SA of France as it moves closer to its restructuring deadline (and potential bankruptcy). China’s Geely Automobile Holdings Ltd. (PINK: GELYF) has interest in GM’s Saab unit, and Fiat SpA (OTC ADR: FIATY) may look to complement its Chrysler LLC line with the German Opel (also late of GM).  Meanwhile, Ford Motor Co. (NYSE: F) claims to be on track with its restructuring plan and still believes it can manage just fine without any government assistance.  On the earnings’ front, The Walt Disney Co. (NYSE: DIS) and Kraft Foods Inc. (NYSE: KFT) bested estimates, while Cisco offered some mixed results as its better than expected numbers actually prompted some profit-taking among techs.

A poorly received 30-year Treasury auction sent bond prices tumbling as fixed income investors focused on the massive programs the government will need to finance over the next few years.  Oil prices surged above $58 a barrel for the first time in six months as traders seemingly failed to consider rising inventory levels and instead bought on signs (feeble as they are) of an economic recovery that would lead to enhanced energy demand.

The Standard & Poor’s 500 Index pushed beyond the crucial 900 level and ended the week in positive territory for the year.  Techs struggled late as investors realized any economic rebound would not translate into capital expenditures overnight.  Still, the Nasdaq Composite Index has outperformed the other indexes on a year-to-date basis.  With stress tests out of the way, where will the next leaks come from?

Economically Speaking

U.S. retailers released same-store sales data for April and the results were actually quite promising.  As usual, Wal-Mart Stores Inc. (NYSE: WMT) led the charge with a 5% increase in activity, while Children’s Place Retail Stores Inc. (Nasdaq: PLCE), Stage Stores Inc. (NYSE: SSI), Gap Inc. (NYSE: GPS), and The TJX Cos. Inc. (NYSE: TJX) were among those stores that posted better-than-expected results and beat analysts’ expectations.  A late-Easter holiday (April instead of March) helped many retailers as consumers waited until the last minute (as has become the norm) for their related holiday shopping.

On the global front, the European Central Bank dropped its key lending rate by 25 bps to 1%, and initiated other monetary moves to stabilize its (16-country) economy.  Likewise, the Bank of England announced a plan to buy up government and corporate bonds, thus, increasing its money supply.

Speaking of the labor market, the U.S. unemployment rate climbed in April to 8.9%; however, only 539,000 jobs were lost from the economy.  The contraction represented the smallest in six months and was below most analysts’ expectations.  Still, since December 2007, about 5.7 million domestic jobs have disappeared and businesses continue to be slow to hire until they see additional signs of greater stability in the economy.

Construction spending climbed in March after five consecutive monthly declines, though the gains were attributed to non-residential activity and the housing sector remains sluggish at best.  In more promising news, the National Association of Realtors reported a 3.2% increase in pending homes sales, the second straight monthly gain.  Because the release is considered a predictive indicator, analysts took it as a favorable sign that sales activity may pick up in the months ahead.

Weekly Economic Calendar

Source: Are Europe’s Banks Next to be Stressed?

More from today’s Money Morning:

Central banks around the world, including the European Central Bank (ECB), the Bank of England (BOE) and the People’s Bank of China, scrambled yesterday (Monday) to shore up liquidity and protect domestic markets against the fallout from the collapse of Lehman Brothers.

The Bank of England and the European Central Bank injected billions of dollars into global money markets and the Bank of China cut interest rates for the first time in six years and lowered capital reserve requirements for its smaller banks.

The ECB allotted roughly $43 billion (30 billion euros) in a one-day money-market auction that was more than three times oversubscribed, Bloomberg News reported. The ECB injected the funds at a rate of 4.25%. The bank also said it would be prepared to take further action if necessary and “stands ready to contribute to orderly market conditions.”

The infusion was virtually identical to action taken by the ECB in August 2007, when the bank offered up $56 billion (40 billion euros) to calm jittery markets. The ECB has put roughly $134 billion (95 billion euros) on the market in the past 13 months, fearful that banks would abandon the interbank lending market and cease lending to one another.

“Sunday’s events mark a turning point in the crisis, but the fundamental premise is the same as it’s been since last year,” Michael Schubert, an economist with Commerzbank AG (OTC ADR:CRZBY) in Frankfurt told The Wall Street Journal. “Banks still do not know how much liquidity they need themselves and there’s even more uncertainty regarding other banks.”

The Bank of England said that it would take necessary measures to boost liquidity as well, and lend out an additional $9 billion (5 billion pounds) at a 5% rate over the next several days.

“The Bank of England will be monitoring carefully the conditions in sterling money markets and will take appropriate actions if necessary to stabilize those markets,” the BOE said in a statement.

Like the ECB offer, the BOE loans were oversubscribed, as Banks bid for $42 billion (24 billion pounds). Of that, 20.75% was allocated.

“This is significantly oversubscribed,” Philip Shaw, chief economist at Investec Securities in London, told Bloomberg. “It largely reflects the tension in the money market after the announcements over the weekend. It’s very welcome to see the Bank of England respond with extra liquidity.”

Still, there’s a distinct possibility that the BOE will have to go a step further and cut interest rates if it hopes to restore confidence to the markets and revitalize growth.

The Confederation of British Industry (CBI) said yesterday that the BOE should cut its benchmark interest rate from to 4.5% by the end of this year, and to 4% in early 2009. The bank has held the rate steady at 5% since April, intent on taming inflation.  The European Commission said earlier this month that the United Kingdom has already entered a recession, its first since 1991, after gross domestic product (GDP) growth fell flat in the second quarter. The EC predicts GDP will shrink by 0.2% in both the third and fourth quarters.

The CBI said the U.K. economy contracted 0.2% between July and September compared to the same period last year, and would suffer a 0.1% decline in the final quarter of 2008. However, the group was upbeat on the economy’s 2009 prospects.

“Having experienced a rapid loss of momentum in the economy over the first half of 2008, the U.K. may have entered a mild recession that will hopefully prove short lived,” said CBI Director-General Richard Lambert. “This is not a return to the 1990s, when job cuts and a slump in demand were far more prolonged.”

Bank of China Cuts Rates

The Bank of China cut its interest rates for the first time in six years yesterday, and reduced the amount banks are required to keep in reserve as Lehman’s collapse roiled credit markets and a depleted global economy weakened the outlook for Chinese exports.

The BOC cut its one-year lending rate to 7.2% from 7.47% and lowered the reserve ratio for the nation’s smallest banks by one percentage point. However, for China’s largest banks (Bank of China Ltd. (PINK: BACHF), Industrial and Commercial Bank of China, Agricultural Bank of China, and others) the reserve requirement will remain at 17.5%.

The bank said the measures are intended to “help solve important problems in [the] economy for its continued stable and fast development.”

The People’s Bank has done nothing but raise rates for the past six years, as the economy routinely posted digit growth rates. But an economy that many were beginning to think of as impervious has shown some weakness as of late, and financial turmoil abroad further dampens its outlook.

China’s 10.1% second-quarter expansion was strong, but it was also a drop from the 10.6% growth posted in the first quarter and down substantially from 2007’s 11.9% growth. Standard Chartered Bank has said China’s rate of growth will slow to 9.9% in 2008 and 8.6% in 2009.

China’s statistics bureau said last week that export growth slowed to 21.1% year-over-year in August, down from 26.9% in July.

“There is an increasing pressure on central banks to act,” Ken Wattret, chief Europe economist at BNP Paribas SA (OTC ADR: BNPQY), told the New York Times.

Of course the BOC had room to act, as inflation eased to a rate of 4.9% in August – a 14-month low. The U.S. Federal Reserve and ECB may find the task of reducing rates slightly more difficult.

“The Fed is more likely to cut rates than the ECB,” said Wattret. “What the Fed doesn’t want is a sustained drop in house and equity prices at the same time. The ECB won’t be at the forefront of cutting rates because it remains focused on inflation.”

Source: ECB and BOE Inject Billions, Bank of China Cuts Rates as Central Banks Cope with Lehman Fallout

Inflation in the Eurozone is running at a 16-year high. And on Wednesday, the Organisation for Economic Cooperation and Development (OECD) boosted its inflation prediction to 3.4% in 2008, well above the ECB’s 2% target.

Policymakers voted to keep the central bank’s key interest rate at 4.0%. The ECB also held its two other key rates – the deposit rate and the marginal lending rate – unchanged at 3.0% and 5.0% respectively, the AFP reported.

“The ECB is trapped,” Joerg Kraemer, chief economist at Commerzbank AG (OTC: CRZBY) in Frankfurt, told Bloomberg News. “We have the problem of persistently high inflation rates, while growth is weakening. I expect them to keep rates on hold for a very long time.”

But with prices for food and fuel soaring across the Eurozone, merely holding rates steady might not be enough for the hawkish ECB.

A rate increase next month “is not excluded,” Trichet said, but “is not certain,” adding that the ECB never “precommits” to a move and that the policymakers would only make a final decision on the day they meet.

Separately, the Bank of England also voted to hold its key interest rate steady at 5.0%.

“Inflation is painfully high and the negative effect on purchasing power is squeezing the life out of the [Eurozone] economy,” Ken Wattret, an economist at BNP Paribas SA in London told Bloomberg. “It now looks increasingly like a consumer recession is unfolding.”

Economic growth is slowing, as even Germany, the European Union’s largest economy, has experienced some softening and an up-tick in unemployment. The OECD revised its growth projection down to just 1.7 % this year and to 1.4% in 2009, AFP reported.

Contrasting Currency Effects

Europe’s central banks have clearly made inflation their priority, a stark contrast to the U.S. Federal Reserve’s aggressive rate-cutting campaign. The Fed has slashed 325 basis points from the key Fed Funds rate since mid-September. The key U.S. interest rate now stands at just 2.0%, well below that of its European counterpart, putting more pressure on an already weak greenback.

Comments from Fed Chairman Ben S. Bernanke on Tuesday acknowledged the weakening effect the U.S. rate cuts have had on the dollar.

Speaking via satellite at the International Monetary Conference in Barcelona, Spain, Bernanke said the Fed is working with the Treasury to “carefully monitor developments in foreign exchange markets.” The Fed Chair said he was aware the effect of the dollar’s decline on inflation and price expectations, Bloomberg News reported.

It is widely expected that the Federal Open Market Committee (FOMC) will vote to remain on pause at its next meeting scheduled for June 24 – 25.

Bernanke’s comments gave a slight boost to the dollar, only to be reversed by Trichet’s allusion to a possibly ECB rate hike in June.

The dollar lost ground against the euro to trade at $1.554 in mid-morning trading today, down from $1.547 at the New York close the day of Bernanke’s remarks.

Source: ECB Stands Firm Against Inflation

Crude oil for June delivery reached $129.331 per barrel on the New York Mercantile Exchange, eliciting dismissive comments from industry experts who say the United States attempts to bring prices down have already been checkmated. Indeed, after a series of repeated failures in that venue, it’s clear the final United States recourse is to break what President George Bush referred to in 2006 as an “oil addiction.”

And that will take years.

Last week, on the same day Bush made a visit to Saudi Arabia, the world’s leading exporter of oil announced it would pump an additional 300,000 barrels of oil a day next month. But investors and analysts alike shrugged off the increase as an insignificant, and token action.

“The 300,000 barrels a day hike in June didn’t help at all,” Eugen Weinberg, an analyst at Commerzbank AG (OTC: CRZBY), told Bloomberg News. “The market is still very robust.”

Since the announcement, Saudi Arabian officials, and many of their colleagues in the Organization of Petroleum Exporting Countries (OPEC), have played down the increase, making it clear that they don’t intend on taking any further action to boost supply. OPEC president Chakib Khelil said Monday the oil group would make no decision on output levels before a meeting in September.

“Current prices aren’t linked to the law of supply and demand,” said Algerian Energy Minister Chakib Khelil, OPEC president, according to government newspaper El Moudjahid.

Khelil forecasts approximately $80 billion in national oil revenues in Algeria for the year.

The U.S. government took another swing at undercutting the price of oil by halting the shipment of oil to the country’s emergency stockpile. President Bush signed off on the bill Monday – even though he had opposed it – in the hopes it would somehow soothe investor speculation, but oil prices have continued to advance.

“He remains against it,” deputy press secretary Scott Stanzel told Reuters, but “I think he saw the overwhelming numbers of members of Congress who want to attempt to have an impact on prices by stopping the fill of the Strategic Petroleum Reserve.”

“Congress keeps… going from Band-Aid to Band-Aid that they think will have an impact but really won’t.”

Congress had previously applied pressure on the president as he left for Saudi Arabia, by introducing legislation to stop a scheduled arms sale to Saudi Arabia unless the country opened its valves a little wider.

“When the President meets with King Abdullah Friday, we cannot settle for a smile, or a handshake, or even a glimpse into his soul,” Senator Charles Schumer of New York said. “We need a commitment to pump more oil. If Saudi Arabia and other OPEC countries do not substantially increase production, we in Congress will block their lucrative arms deals.”

Still, neither the Saudi increase or diversion of oil from the U.S. emergency stockpile have taken the sting out of record-high oil prices, which have driven the price of gasoline up for 13 straight days.

Gas prices roared above $3.75 a gallon yesterday, as the average national price of a gallon of regular gas rose 2.6 cents overnight to a record $3.758 a gallon, according to AAA and the Oil Price Information Service. Gas prices are 67 cents higher than a year ago, and are expected to continue rising through the Memorial Day weekend.

Unfortunately, the American consumer – already hampered by a credit crisis, a lack of home equity and soaring food prices – will find no reprieve at the pump, as oil prices seem destined to keep rising.

It was just last week that Goldman Sachs Group Inc. (GS) raised its price forecast for the second half of the year to $141 a barrel. Goldman Sachs analysts had previously quoted a price of $107 a barrel.

That assessment was corroborated yesterday by billionaire hedge fund manager T. Boone Pickens, who said the price of oil would reach $150 a barrel by year’s end. Pickens’ Mesa Power LLP recently unveiled the first phase of an eventual $10 billion alternative energy project that has the potential to become the world’s largest wind farm.

“You find an oilfield, it peaks and starts declining, and you’ve got to find another one to replace it,” Pickens said of the deal. “It can drive you crazy. With wind, there’s no decline curve.”

Though Pickens once operated one of the largest independent oil-and-gas production companies in the country, he believes it’s time for a new energy direction.

“We are going to have to do something different in America,” Pickens said. “You can’t keep paying out $600 billion a year for oil.”

Money Morning Investment Director Keith Fitz-Gerald – a longtime energy bull – thinks prices will ultimately spike as high as $225 a barrel.

That projection represents a revision from a market call he made in December, when crude prices were in the $90-a-barrel range. At that time, Fitz-Gerald caused a stir when he predicted that oil prices were headed for $187 a barrel. He reiterated that prediction back in early March – just before the investment-banking crowd started making their hefty forecasts for oil and gasoline.

With no end in sight for soaring oil prices, the United States finally began working towards a greater level of energy independence with the Energy Independence and Security Act, which mandates that alternative fuels be mixed into the nation’s gasoline supply and requires cars to have a fuel economy standard of 35 miles per gallon by 2020. 

The act became a law in December 2007 and the effects can already be seen. In the first three months of 2008, foreign oil imports accounted for 57.9% of the United States’ oil supply versus 58.2% a year ago. The drop may have been slight but it was the first decline since 1977, the Financial Times reported.

Foreign oil dependency is expected to fall from 60% to 50% by 2015, before rising back to 54% in 2030 according to the Department of Energy.

“The 1970s is the last time we saw any significant decline in net import dependency in the U.S.,” Guy Caruso, head of the U.S. Energy Information Administration, told the FT. “It shows that markets do work, policy changes do work, technology does work.”

Reducing the amount of oil it imports from overseas seems right now to be the only viable solution to the country’s energy conundrum, as oil prices show no signs of abating in the near future.

Source: With Oil Nearing $130, Kicking the ‘Oil Addiction’ Looks Like the Sole U.S. Hope

Gross domestic product (GDP) in the 15-country Eurozone increased by 0.7% in the first three months of the year, Eurostat reported. Analysts had predicted a growth rate of 0.5%.

Germany and France – which together account for nearly half the Euro region’s GDP – made the difference. The German economy, the continent’s largest, expanded by 1.5% in the first quarter, compared with a growth rate of 0.3% in the final three months of 2007. France also turned in a respectable performance, advancing at a 0.6% clip.

Although the strong growth underscores the global economy’s resilience in the face of a sputtering U.S. economy, and appears to justify the European’s Central Bank’s focus on taming inflation, analysts warn the celebration may not last.

A key cause for concern: Despite their strong performance, both France and Germany showed signs of declining consumer demand, which is why analysts are skeptical that such stellar growth can continue.

“A Chinese proverb says that it is better to light a candle than to curse the darkness,” Carsten Brzeski, an economist for Dutch finance group ING Groep NV (ADR: ING), told Reuters.” However, at the current juncture, one should not be blinded by the German GDP numbers.”

Indeed, earlier this month, data from Germany’s Federal Statistics Office showed retail sales in March were down 0.1% from February, and down 6.3% from a year earlier. Food, drink, and tobacco sales led the decline, as consumers cut back in the face of soaring inflation.  Consumer prices in April jumped 2.4%.

The story is the same for a multitude of other European nations. Eurozone inflation backtracked slightly in the month of April, sliding to 3.3% from a 16-year high of 3.6% in March, but remained well above the ECB’s 2.0% ceiling.

“There are significant pressures facing consumers in Europe,” Howard Archer, chief European economist at Global Insight Inc., told Forbes.com. “Higher inflation and soaring food prices are weighing down on consumer purchasing power in Europe. It is a depressing factor throughout the continent.”

“Consumer confidence is weak in Europe and low spending is bound to hurt the overall economy,” he added.

The European Central Bank (ECB) has remained hawkish on inflation, which it considers “the main problem that we have to face in the short term.” The ECB has held its benchmark interest rate steady at 4.0% for nearly a year now, despite an aggressive string of rate cuts by the U.S. central bank that has left the benchmark Federal Funds Rate at 2.0%.

Still, rising worldwide commodities prices and a weak U.S. dollar continue to drive up inflation throughout the Euro region.

The European Commission (EC), the executive branch of the European Union, said last month that Eurozone growth would continue to erode throughout 2008 and 2009.

The EC predicted the combined growth rate for the 15 countries that use the euro would slow to 1.7% this year and 1.5% next year. It was second time in six months that the commission has reduced its growth estimate for the region. In November the group was projecting growth of 2.2%.

According to the EC, “the recent sharp rises in food and energy prices have depressed households’ purchasing power and consumer spending in the last quarter of 2007 and are expected to continue to do so during most of 2008.”

If the Eurozone does lose its momentum in the months ahead, the ECB could find itself in a precarious position, as abiding inflation might keep the bank from cutting rates to spur growth.

“There is definitely no room for the ECB to cut rates,” Joerg Kraemer, chief economist at Commerzbank AG (OTC: CRZBY) in Frankfurt told Bloomberg News.

Source: European Growth Strong in the First Quarter, but Will it Last?