The eurozone is tipping into a deeper downturn than America itself despite the tremors in the US mortgage industry, and may already be in full recession for the first time since the launch of the single currency.
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Industrial production for the EMU bloc fell 1.9pc in May, according to fresh Eurostat data. It is the sharpest one-month decline for the region since the exchange rate crisis in 1992. Officials in Berlin have warned that Germany's economy could contract by as much as 1.5pc in the second quarter as export orders crumble.
Industrial output in both Italy and Greece has slumped 6.6pc over the past year. Portugal is off 6.2pc. "It is a very ugly picture: we're on maximum alert," said Emma Marcegaglia, head of Italy's business federation Confindustria.
Rome is now lobbying for a "New Deal" to revive Italy's economy through massive infrastructure projects.
The idea is to use bonds issued by the European Investment Bank, allowing EU states to circumvent the 3pc limit on budget deficits imposed by the Maastricht Treaty.
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Jacques Cailloux, Europe economist at the Royal Bank of Scotland, said a "reverse decoupling" is now under way as Europe goes down harder than the US - just as it did after the dotcom bust. "There is loss of momentum across the board. We can't exclude a recession," he said.
Spain is now spiralling into the worst crisis since the Franco dictatorship. "The economy is in dire straits," said Dominic Bryant, Spain expert at BNP Paribas.
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"Some of the housebuilders are going to go bust, it is as simple as that. Over 10pc of Spain's economy has been building houses. This compares with 6pc-7pc in the US at the height of the bubble. The adjustment will be enormous," he said.
Fear haunted the Spanish property sector yesterday after the share price of developer Martinsa-Fadesa crashed by more than 50pc in two days, leading to a suspension in trading by the Madrid bourse. The real estate and shopping mall group has so far failed to secure refinancing for its €5.1bn (£4.1bn) debt. The board held an emergency meeting yesterday.
Finance minister Pedro Solbes said the Martinsa-Fadesa crisis was turning "more complicated" but denied that there is any risk of a chain reaction across the sector. Banco Popular is understood to be the most exposed bank.
The crunch engulfing Spain's property market is rapidly turning into a full-fledged national drama. The developers' association APCE said house prices had already fallen 15pc since September. Unemployment has risen by 425,000 over the past year, reaching 9.9pc.
Deutsche Bank said the property crisis is more serious that the collapse in the early 1990s. It expects a 35pc fall in real house prices by 2011 as the market slowly clears the vast overhang of property, now estimated at nearly 700,000 homes.
In Castilla-La Mancha - Don Quixote's region - some 69pc of all houses built over the past three years are still unsold.
Spain's premier, Jose Luis Zapatero, blamed the European Central Bank for making matters worse by raising interest rates into the teeth of the crisis last week. He called the move "irresponsible". More than 98pc of home loans in Spain are priced off floating rates linked to Euribor, which has risen 145 basis points since August.
Mr Zapatero has resorted to a fiscal boost worth 1.5pc of GDP to help cushion the slump. But Spain's budget surplus is turning into a deficit as tax revenues collapse. Car sales, for instance, fell 31pc in May. The Bank of Spain is concerned about the health of smaller regional lenders with heavy exposure to the mortgage market. Deputy governor Jose Vinals has called on banks to set aside more against bad debts. "Provisions need to keep rising throughout the year. Prudent coverage levels are needed to face this situation with confidence," he said.
The precipitous slide now under way in Europe has yet to cause investors to lose their ardour for the euro, but a number of analysts, including Bill Gross, head of the giant bond fund Pimco, say there is no justification for the euro's 25pc to 30pc over-valuation against the US dollar. "We're turning incredibly bearish on the euro," said BNP Paribas.
The counter argument is that the US has merely stolen growth from the future with this spring's one-off fiscal stimulus package. Dollar bears expect a nasty second leg to the crisis later this year, forcing the Fed to slash interest rates to 1pc or lower.
Goldman Sachs said Europe is the "tie-breaker" for the whole global economy
