Euro economy shrinks 0.2%

The 15-nation euro-region economy contracted 0.2 per cent in the second quarter, shrinking for the first time since the start of the single currency, the European Union statistics office in Luxembourg has said.

The German, French and Italian economies, the three largest in the euro area, also shrank. European Central Bank President Jean-Claude Trichet said on August 7 that growth in the euro region would be "particularly weak" through the third quarter, even as the Frankfurt-based bank held its benchmark interest rate at a seven-year high to tame price rises.

Top ECB economist Juergen Stark said weaker eurozone economic activity should be temporary, but weak banks should be allowed to fail.

"For me, a phase of weakening and a progressive convalescence is the most likely scenario," he said.

"After the German economy began the year with a bang, that was to be expected. I nonetheless foresee more than a simple correction," Stark said.

"Domestic demand in particular is developing less strongly than anticipated. But this weakness will be temporary."

In response to a question on whether or not the ECB should try to save banks in peril, Stark said: "Weak banks should be allowed to disappear from the market.

"Bad management must be sanctioned. A rescue is justified only when there is a threat to the entire financial system."

The ECB economist reiterated central bank warnings about medium-term inflation and excessive pay raises, and said consumer prices were likely to rise further. German inflation hit 3.3 per cent in July, the highest level in 15 years, and figures for August are due in the coming days.

Other eurozone countries were to release their own data late yesterday, with an estimation for the entire economic zone due shortly thereafter.