Euro Economy Flatlines As Greek Exit Looms

The eurozone's ailing economy stagnated in the first quarter of 2012, narrowly avoiding a double-dip recession, official data has shown.

The single currency bloc's economy saw zero growth in the first three months of the year, beating forecasts of -0.2% and following a contraction of 0.3% in the final quarter of 2011.

The region's economy has been dragged down by the debt crisis in southern Europe, led by Greece - whose future membership of the single currency is in doubt.

The bloc's latest data was boosted by better than expected growth in Germany, the eurozone's largest economy.

Gross domestic product (GDP) in Germany rose by 0.5 % in the first quarter of the year, bouncing back from a 0.2% slide in the last three months of 2011.

But while Germany's robust growth confounded expectations, the region's next biggest economy stagnated, with France showing no growth at all.

The divergent performance of the eurozone's two largest economies fuelled an austerity versus growth debate as the bloc teeters on the edge of a new crisis, centred on fears that Greece may be forced to leave the euro.

Debt-laden Greece is coming under mounting pressure to form a government and then sign up to a bailout plan agreed with the EU and the International Monetary Fund.

But while the uncertainty has led to a number of key figures openly discussing the country's exit from the union, that suggestion was dismissed as "nonsense and propaganda" by EU policymakers.

Speaking after six hours of talks in Brussels among the 17 finance ministers from the eurozone countries, group chairman Jean-Claude Juncker said: "I don't envisage, not even for one second, Greece leaving the euro area.

"This is nonsense; this is propaganda. The exit of Greece out of the euro was not the subject of our debate today. Absolutely no-one, absolutely no-one, argued in that sense.

"But the Greek public, the Greek citizens, have to know that we agreed on a programme and this programme has to be implemented."

Eight days after inconclusive elections, Greece's political parties have failed to form a coalition and opinion polls show anti-bailout parties would perform most strongly in a fresh vote, which is likely next month.

EU officials have stressed that room for renegotiation of the 130bn euro bailout is limited, although Mr Juncker appeared to offer some leeway to Athens, if Greek parties manage to overcome differences and back the bailout reform plan.

Chancellor George Osborne criticised countries for speculating over Greece 's possible exit from the euro.

"The eurozone crisis is very serious and it's having a real impact on economic growth across the European continent, including in Britain, and it's the uncertainty that's causing the damage," he said.

But with official data showing the UK slipped into a double-dip recession in the first three months of the year, the Chancellor's economic policy - and austerity measures - are set to come under further pressure now that the eurozone narrowly avoided a recession.

Ministers blamed the recent contraction in the economy on the crisis on the eurozone.   

Meanwhile, German Chancellor Angela Merkel, who backs tough debt-cutting programmes, is due to meet new French President Francois Hollande in Berlin .

He will press for a European growth strategy, which Germany has not opposed but which it insists cannot be funded by extra government spending it says would drive debt back up.

The latest economic data helped calm Europe's main financial markets, which plummeted on Monday as investors' fears over a Greek exit from the single currency intensified.

London's benchmark FTSE 100 index, Frankfurt's DAX 30 and Paris' CAC 40 all rose during morning trading.