The Eurozone economy, which covers the 15 nations that share the euro currency, contracted 0.2% in the second quarter, as a 0.5% decline in Germany and a 0.3% decline in France offset gains in the smaller economies of Austria, Portugal and Spain, Eurostat, the European Union’s official statistics office, announced yesterday (Thursday).

The decline marks the Eurozone’s first contraction since 1996, when the euro was introduced and Eurostat began tracking the data.

While declining to speculate on the potential for a recession, “the signs are not really very good for the future,” Amelia Torres, spokeswoman for EU Economic and Monetary Affairs Commissioner Joaquin Almunia, told Bloomberg News in Brussels yesterday. “It’s a bit exaggerated to use that word.”

The year-over-year growth rate for the 15-nation Eurozone’s slowed to 1.5%, its third consecutive quarterly decline.

“The strains from the global economic downturn, the surge in oil and commodity prices up until recently, and the euro appreciation have been simply too strong,” Nikolaus Keis, economist at Unicredit SPA (PINK: UNCFF), told Reuters.

European exports have been hurt by a strong euro, while growing unemployment and high consumer prices have lead to a curb in domestic consumption.

Just last month, inflation was the key worry for European Central Bank policymakers, which is why they increased their benchmark interest rate by a quarter point, elevating it to 4.25%. But last week, at its most recent meeting, the ECB monetary policy committee voted to hold rates steady.

ECB President Jean-Claude Trichet said that while, growth will be “particularly weak” in the second and third quarters, inflation is also “likely to remain well above levels consistent with price stability for a protracted period of time.”

“Risks to price stability over the medium term remain on the upside,” he added, noting that recent data “underpinned” the bank’s decision to raise rates last month.

Inflation remains a concern, but with a contracting Eurozone economy, the focus will now shift to weak economic growth, as policymakers will scramble to avoid a full-blown recession.

“With growth slowing abruptly and inflation expectations off their peak, risks of a near-term ECB hike have been wiped out,” said Aurelio Maccario, chief Eurozone economist at Unicredit.

At 4.0% for the quarter, Eurozone inflation is still well above the ECB’s target rate of 2.0%, making any near-term easing of interest rates equally unlikely.

The broader 27-nation European Union economy also contracted, declining 0.1% in the second quarter and growing 1.7% year-over-year.

Estonia became the first EU nation to official fall into a recession, as the country marked its second consecutive quarter of GDP contraction.

Source: Weak Exports and Domestic Spending Declines Push Eurozone to the Recessionary Brink