* Morale weakens for fourth month in July to 34-month low
* Economic sentiment falls in Germany, France, Spain
BRUSSELS, July 30 (Reuters) - Economic sentiment in the euro
zone fell to near a 3-year low in July as the bloc's economy
deepened its slump and businesses became more pessimistic.
The 2-1/2 year debt crisis that spread from Athens - now
struggling to stay in the euro zone - has continued to spread
across Europe.
Spain's recession deepened in the second quarter and
economic sentiment in both Germany and France took a hit data
showed on Monday. Only non-euro zone member Sweden has upbeat
news, reporting accelerating output in the quarter.
Eating away at fragile confidence that was badly damaged by
the 2008/2009 financial crisis, Spain's economy shrank 0.4
percent from the previous quarter as it fought to overcome a
burst housing bubble and to cut its budget deficit dramatically.
Investor concerns about Spain have pushed its funding costs
to euro-era highs and the world's no.12 economy risks being
pushed towards a full bailout unless it can regain market
confidence, in turn hurting business confidence.
"People are asking: what is the future for the euro zone?"
said Julian Callow, an economist at Barclays Capital. "All the
while, we are searching ourselves and asking what is going to
turn this around here. And there are not many answers."
The mood in businesses across the euro zone fell to a
34-month low in July, near levels last seen after the collapse
of U.S. investment bank Lehman Brothers, the European
Commission's sentiment index showed, with morale falling across
all sectors.
The index fell to 87.9 points in July from 89.9 in June,
worse than economists' expectations of 88.7 points. Business
sentiment fell for the fifth straight month.
European Central Bank President Mario Draghi vowed in London
last week to do "whatever it takes to preserve the euro" and
this Thursday's policy meeting will be closely watched. Draghi's
comments have raised hopes high, leading some economists say
confidence could take a further hit if the ECB fails to convince
markets it is taking effective action.
"The deterioration in economic sentiment adds to evidence
that the euro zone is heading deeper into recession," said
Jennifer McKeown at Capital Economics, who sees the 17-nation
bloc's economy contracting 1.5 percent this year.
The International Monetary Fund is more optimistic, seeing
only a 0.3 percent shrinkage in all of 2012 and a mild recovery
next year. Credit rating agency Standard and Poor's said on
Monday it sees a 0.6 percent contraction this year.
GERMAN MOOD
In a sign that the impact of the debt crisis is being felt
across the bloc and not just in the indebted south, morale
posted its sharpest decline in a year in Germany, the bloc's
biggest economy and largest contributor to the region's
financial bailout funds.
Confidence in the euro zone's manufacturing sector, crucial
to the euro zone's still relatively healthy export industry,
continued its downward trend that started in March as production
expectations fell and managers worried about their order books.
The mood also soured in France, the euro zone's second
largest economy. President Francois Hollande is caught between
trying to revive growth with major infrastructure projects and
European Union rules requiring Paris to bring the budget deficit
to below 3 percent of economic output next year.
A lack of consumer confidence in France and across Europe
was highlighted earlier this month by French automaker PSA
Peugeot Citroen's decision to cut 8,000 jobs as it
struggles with weak demand for its vehicles.
"As long as consumer and businesses continue to question the
solidity of the monetary union, there's little hope to see an
upturn before long," said ING economist Peter Vanden Houte.
European Union leaders signed a pact in June to inject 120
billion euros ($145 billion) into the economy, including a plan
to increase the European Investment Bank's capital by 10 billion
euros so it can raise its lending capacity by 60 billion euros.
While a weaker euro, record low euro zone interest rates and
signs of stabilisation in China's economy could also help revive
growth, the lack of confidence remains a major issue.
"Today's dismal figures only increase the pressure on
European policy makers to act decisively to stop the rot in the
euro zone," Vanden Houte said.