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As Eurozone Economy Shrinks, Government Debt Loads Grow

By David McHugh

FRANKFURT, Germany -- Europe's government-debt crisis is no longer panicking financial markets. But it won't end until the region's economy starts growing strongly again.

And that will be a while.

The economy of the 17 countries that use the euro has shrunk for two straight quarters -- a common definition of a recession -- and analysts forecast little or no growth until 2014.

Without growth, there won't be enough tax revenue to help countries like Greece, Italy, Spain and Portugal narrow their deficits and slow the expansion of their debts. Their debt burdens as a percentage of economic output, a key measure of fiscal health, look worse by the day.

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The eurozone's combined debts are equal to about 93% of the region's gross domestic product this year, and that figure is forecast to rise to peak at 94.5% next year. In 2009, the eurozone's debt-to-GDP ratio was 80%. A ratio above 90 percent is generally considered high and can put pressure on governments' borrowing costs.

"The worrying thing about the projections is, the peak seems to keep moving," says Raoul Ruparel of the Open Europe think tank.

The panic in European financial markets has eased in recent months largely because of aggressive action by the European Central Bank. The ECB said on Sept. 6 that it was willing to buy unlimited amounts of government bonds issued by countries struggling to pay their debts. That pledge quickly lowered borrowing costs for Spain and Italy, which earlier in the year faced the same kind of financial pressure that forced Ireland, Greece and Spain to seek bailouts.

But stemming the crisis and heading off a default by one or more countries aren't the same as stimulating growth. The U.S. economy remains weak several years after actions by the Federal Reserve helped arrest its financial crisis.

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