(MENAFN- AFP) Italy fell back into recession Wednesday in a surprise setback that highlighted worries that the eurozone's fragile recovery, burdened by the Ukraine crisis, may be flagging.
The Italian economy shrank unexpectedly by 0.2 percent in the second quarter, dragging the country back into recession in a sharp blow for Prime Minister Matteo Renzi, who has told Europe Italy plans to lead by example on growth.
Even powerhouse Germany appeared to suffer from increased anxiety regarding Ukraine as figures showed its industrial orders slid steeply in June, sparking concerns that geopolitical tensions are hurting Europe.
Investors were spooked further by NATO's accusations that Russia has sent more troops to the Ukraine border and could be planning to use the pretext of a humanitarian mission to invade eastern Ukraine.
Italian, Spanish and Greek 10-year government bonds fell, while Europe's stock markets dropped, with Portugal leading the way.
Italy's contraction, which follows on the heels of a fall in the first quarter, was worse than analysts expected, leaving the eurozone's third-largest economy embarrassingly behind its EU neighbours on the slippery road to recovery.
The country was hit hard by the eurozone debt crisis and only emerged from its worst recession since World War II last year.
The youthful Renzi, who had hoped to persuade Germany to ease budget rigour for troubled countries by showing off the power of reforms in Italy, shrugged off the downturn and swore he would "go forwards with even more determination".
"Without uncertainties, without fear, without delays. The reform process is underway and it's a one-way street," he said.
The official Istat data agency said in an initial estimate that Italy's gross domestic product had shrunk by 0.3 percent from the same period last year, the lowest second-quarter level for 14 years.
Explaining the drop, Istat said poor exports had dragged on growth, along with weakness in industry, services and agriculture.
Industrial production rose 0.9 percent month-on-month in June but contracted by 0.4 percent in the second quarter, mainly due to a lapse in May, separate data showed Wednesday.
- Obstacles to growth -
Appeals from France - the eurozone's second-biggest economy - for Germany to do more to help promote economic growth in Europe were rebutted Wednesday, when a government spokesman said Berlin was already pulling its weight.
Key data for the French economy suggest it too is lagging behind the recovery of other EU members. But while Paris's debt stands at around 91 percent of GDP, Rome's is forecast by analysts to rise to over 135 percent of GDP in 2014.
"The eurozone recovery, which began in spring last year and has gradually spread around most of the currency area, has not yet taken hold in Italy," said Christian Schulz, senior economist at Berenberg.
Italy's Finance Minister Pier Carlo Padoan insisted the country would not breach the European Union's 3.0-percent deficit ceiling "either in 2014 or 2015".
"There are no shortcuts to a return to growth. We have to remove the obstacles in our path through reforms," he said in an interview.
But Rome has been forced to admit it will miss its 2014 growth target of 0.8 percent. The Bank of Italy and International Monetary Fund (IMF) have already slashed their forecasts, to 0.2 percent and 0.3 percent respectively.
Martin Lueck, European Economist with UBS, said "market optimism regarding Italy based on Renzi's optimism and drive for reforms" may be dampened by the return to recession.
Analysts warned Renzi, who came to power in February after ousting his predecessor for failing to do enough to revive growth, has still got a long way to go.
"Can Renzinomics fix the economy" asked Daniele Antonucci from Morgan Stanley Research, saying it would depend on Italy's "political stability".
"The approval of the new electoral law, a key step in this direction, is halfway through... but the whole process may still require one extra year and is subject to setbacks," he said.
Even reforms will do little to protect Italy from its "strong exposure to Russia and the Middle East," said Lueck, where its key energy and trade links are at the mercy of political instabilities.
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