Figures last week showed that the economies of Germany, France and Italy all slowed in the second quarter. The Eurozone as a whole contracted by 0.2% in the April to June period, the first time it has done so since the launch of the euro almost a decade ago.

Now the talk is of emergency budgets and "packages of measures" to rescue Europe's leading economies from a prolonged downturn and rising unemployment. Last week the French prime minister, François Fillon, convened a meeting of cabinet ministers – almost unheard of in August when Paris shuts down – to consider possible emergency measures.

And last week, Spain's prime minister José Luis Zapatero interrupted his summer break and summoned ministers back to Madrid to put together a $30bn (£16bn) package of new financing for homebuyers and businesses. The move came after the country's statistics office reported more troubling news about a dramatically slowing economy. After a decade of growth, it grew by just 0.1% in the second quarter.

Germany's economy, after a cracking start to the year, shrank by 0.5% and will be lucky to turn in growth of 1.7% this year, against 2.5% in 2007. For the Eurozone as a whole, the European Central Bank president Jean-Claude Trichet warned last week the third quarter would be "particularly weak". With inflation running way above target at 4%, prospects of an early cut in ECB rates are remote.

So how is it that the economies of continental Europe look to be first into recession? This slowdown emanated from America. It was the US sub-prime loan debacle that triggered huge problems for US banks and the financial sector, and a dramatic fall in house prices and sales.

The latest figures show that foreclosures in America are now 55% up on last year. And for months it looked as if America would be first into recession. Now, with consumer spending, unemployment and consumer confidence surveys better than feared, the US has been able to avoid recession – for now.



Much emphasis was being placed last week on the role of "external factors" in pushing Europe's economies into "technical recession". So would these be the same external factors that are playing on all economies? And is not a technical recession the same as a common or garden Anglo-Saxon recession – two successive quarters of falling output?

There is no doubt that the Eurozone is suffering a big loss of momentum due to the credit crunch, strong euro (until recently) and high commodity prices. It is also true that while the ECB held interest rates steady, and then increased them recently to 4%, the US Federal Reserve slashed rates to 2% and the administration put in hand a fiscal stimulus by way of a $600-a-head tax relief boost. In these circumstances the wonder is not that America's progress to recession has been slowed but that recession – technical or otherwise – is still thought likely.

The truth is Europe's problems are by no means all due to those "external factors". The Eurozone is suffering a large and rising financial deficit, high corporate debts and a rising debt service burden. And the combined effect is likely to be a deeper and longer downturn than most are allowing for. "Technical" may be the label. "Fundamental" it will be.

When we look under the bonnet of the Eurozone machine it is clear that more is going wrong here than "external factors". The corporate sector is more overextended than commonly realised, with the result that the retrenchment in jobs and investment will be sharper than expected.

First-quarter figures on corporate balance sheets show that for the non-financial sector (broadly, manufacturing and non-bank service companies) the deficit as a share of value added rose to 4.6% in the past four quarters, the highest since 2001. Such a large and rising corporate sector deficit is, says Citigroup economist Michael Saunders, "usually a warning sign of inherent instability. Time and again in various countries, a large corporate sector deficit has been a precursor to a slowdown."

"The sharp rise in corporate debt levels in Spain and France and tightening in lending standards reflects these trends," says Saunders. "The subsequent collapse in Spain's growth amid soaring unemployment and tightening lending standards suggests that retrenchment is now under way. But even with the emergency government package, the colossal scale of Spain's imbalance suggests that worse lies ahead."

Thus has the strong euro, until recently, hid an ever more troubling picture of slumping orders, slowing business output, property price declines and plunging consumer and business confidence. That's not good news for us, as the Eurozone accounts for roughly half of our exports.

Two factors have come rushing to the aid of the Eurozone. The first is a continuing fall in the price of oil, which should ease price pressures. The second is a fall in the euro against the dollar, which may have further to go given the poor outlook for the third quarter. What was seen by some as a virility symbol of Europe's underlying superiority over the Anglo-American way has at some stage to reflect the realities underneath. With unemployment rising sharply, these realities are more than "technical".