Europe's Economic Bounce May Be Short

It turns out, despite all the dread surrounding the euro zone since the past fall, that the continent’s economy has been doing much better than expected. The euro zone's GDP increased 1 percent in the second quarter, driven by Germany. Western Europe’s largest economy surged 2.2 percent, enough to offset the slowdowns in debt-ridden Greece and Portugal.

Compare that with the United States’ own flaccid 0.6 percent growth last quarter, and one could be forgiven for believing that all the Euro fear racking Wall Street is cross-continental projection. “This negates the fear that Europe is about to fall off a cliff,” says Peter Cardillo, chief market economist at Avalon Partners.

But don’t expect the good news to last. Across the continent, governments, horrified by Greece’s slide into insolvency, are slashing budgets. The U.K., for example, is planning to cut its budget by several GDP percentage points. European austerity measures haven’t yet taken effect, but when they do Europe’s economy is bound to hit a speed bump that may look more like a wall. “It’s unlikely that the growth can be sustained at even a moderate level in the second half of the year,” says Sal Guatieri, senior economist at BMO Capital.     

And it’s important to note that much of the growth was driven by German exports to China, which is brimming with new millionaires eager for Mercedeses, and German precision machinery continues to power the Chinese manufacturing market. But China’s government is pouring cold water on its own economy to head off inflation, and the government has quashed even the modest rise of the yuan against the dollar, which could have helped sustain a hunger for Western imports.

All of which means that while the EU may be unlikely to face financial collapse in the months ahead, don’t count on it boosting America. Looks like a sluggish recovery in the second half of the year will be international.