Germany and France both reported increases in growth and the numbers have convinced some analysts that Europe’s economy is recovering, perhaps even faster than that of the United States’, reports Charlie Parker for Citywire.

There are some risks, though:

• Some economists think, however, that the improved numbers may not be a show of overall economic strength but rather a fall in imports as exports remain the same, which would come up as a stronger net trade.

• The unemployment rates in Germany and France may also be misleading because of the larger public sector. It is seen that the fall in production in Europe did not reflect an equal fall in unemployment. The economies could suffer later from the excess weight.

• The European Central Bank has cut its benchmark interest rate to a record 1% low and begun a $86 billion program of buying assets, writes Simon Kennedy for Bloomberg. Officials are regarding the economic recovery with caution and won’t be reversing their policies any time soon.

• The ECB projected that the European economy may contract 4.6% this year and contract 0.3% in 2010. Deutsche Bank estimates a 1.3% contraction next year and UBS AG predicts 2.1%.

One way to access the European market is through the PowerShares FTSE RAFI Europe (PEF) ETF. PEF, currently up 42% year-to-date, tracks the performance of the largest European equities in the FTSE RAFI Europe Index, which normally invest 90% of its total assets in securities that comprise the Index and ADRs based on securities in the Index, as stated by InvescoPowerShares. The ETF has 526 holdings with an expense ratio of 0.75%.

• Country allocations: United Kingdom 30.6%, France 14.7%, Germany 13.3%, Italy 7.6%, Switzerland 6.4%, Netherlands 5.8%, Spain 5.3%, Sweden 4.0%, Ireland 2.6%, Belgium 2.5%

For more information on Europe, visit our Europe category.

Max Chen contributed to this article.

After an increase in government spending, Standard & Poor’s downgraded the country’s long-term sovereign credit rating to “AA” on concerns of a costly government bailout of banks. Further downgrades are also possible if the government’s fiscal performance continues to weaken, according to The New York Times. Rival credit rating agencies, Moody’s and Fitch, have also downgraded Ireland’s debt.

The downgrade could translate into higher interest rates for the country as investors would demand more from riskier government bonds.

In a report released by the University of Ulster, economists advised the government on the merits of public investment so as to provide social and economic benefits during a recession, as stated in Belfasttelegraph. It is thought that the potential boost in job creation is justified by the increased investments.

However, there is some good news provided by the Ulster Bank, which said the local economy is shrinking at its slowest rate in a year, which further supports the idea that the worst could be over, reports Symon Ross for Belfasttelegraph. But Northern Ireland’s economy is still under-performing that of the rest of the United Kingdom’s and the weakness seems to be  stemming from the construction sector.

• New Ireland (IRL): up 39.7% year-to-date

Max Chen contributed to this article.

So long as U.S. multinational corporations keep their earnings overseas, they are legally safe from paying taxes toward their home base. Netherlands is a corporate tax haven for U.S. multinationals, and together with Ireland and Bermuda, it is sheltering companies’ earnings from the U.S. tax authorities, so says Barack Obama.

This practice is fully legal but the trade-off is a detriment to the U.S. economy, reports Associated Press on Dutch News. U.S. companies typically pay a 35% tax for corporate earnings, or around 22% after certain allowances.

Obama is working on a proposal to cut overseas tax benefits for U.S. multinationals.The idea is to cut tax benefits for those U.S. corporations that invest overseas and use some of their forecasted revenue to gain tax credits for investment in research and development, reports Quentin Fottrell for The Wall Street Journal.

The worst-case scenario for places such as Ireland is less foreign development as well as less attractiveness for multinationals. Despite this speculation, the consumer confidence remains solid within the European Union. A monthly survey of companies and shoppers across the European Union and in the 16 countries that share the euro showed renewed optimism for the first time since May 2007, reports Aoife White for San Diego Union Tribune.

• iShares MSCI Netherlands Investable Market Index (EWN): up 0.1% year-to-date

Ireland’s Central Bank projects that Irish GDP will fall 6.9% this year and 3% next year as a result of decreased construction projects and increases in unemployment, reports Colm Heatley for Bloomberg. Unemployment is estimated to reach 14.4% next year.

The government unveiled an emergency budget yesterday, and the country’s budget deficit reached $5 billion, or tenfold, in the first quarter. The Standard & Poor’s downgraded Ireland’s top credit rating this week.

According to Forbes, some key points in the budget include:

• New tax measures will raise $2.4 billion in 2009
• Spending cuts will save about $2 billion
• Ireland will buy the bad debt of banks through a new agency
• Excises on cigarettes will go up by 25 cents per pack

Domestic demand has significantly weakened, which reduced outlook for growth in recent months, according to finfacts. Deteriorating labor market conditions has output diminishing in most sectors.

Consumers are hoarding money in what seems like a precautionary saving, the household saving rate is calculated to double between 2007 and 2009.

International trade has dropped in the downturn and this had an averse effect on Irish exports, which amounts to around 80% of GDP.

• The New Ireland (IRL): down 9.3% year-to-date

Max Chen contributed to this article

Back in the good ol’ days, low interest rates, inward immigration and bank lending sprees helped drive housing’s share of the economy from 5% to 14%, the highest percentage in Europe, reports Landon Thomas Jr. for The New York Times.

Policy makers in Ireland where delightfully distracted by record tax inflows and a full-employment economy which helped overshadow the warnings of a imminent crash. The result are housing prices that have diminished by 50%, bank shares plummeting 90%, unemployment approaching 10%.

The sings of a housing bubble manifested itself with family homes in Dublin costing as much as similar housing in Beverly Hills with house prices more than doubled over a 10-year period. Housing debt jumped from 60% to 160% during the same period as a percentage of GDP.

The Irish government has announced a $7.5 billion bank bailout and have taken majority stakes in large banks in a move to quell doubt in the reliability of bank deposits. It is still uncertain whether or not the government will continue to allow banks to support high-risk, high-reward loans recklessly directed to developers.

• NETS ISEQ 20 Index (IQE): down 47.7% since Aug. 22 inception

A deepening Irish economic downturn because of the global credit crisis and low business confidence experienced a small respite in the third quarter as the gross domestic product (GDP) rose 1.2%, reports Jonathan Saul for London South East. The Irish GDP rose 0.1% for the year compared to analyst forecasts of a 2% contraction.

The gross national product (GNP) fell 0.9% in the same quarter against a 3.5% drop in the previous three months. It is predicted that growth will worsen further in late 2008 and early 2009. Early indicators are showing greater contraction in the fourth quarter and 2009 because of recent changes in the euro exchange rates.

Government forecasts a 3% to 4% contraction in the economy next year, which makes it a record worst recession experienced by Ireland.

So, what’s the plan of attack?

First, the government has put forth a $7 billion bailout of its banking system. The top three banks will get the money, reports Stephen Beard for Marketplace. It’s not without strings: the banks will be required to increase mortgage lending by 30%. It’s a tall order, since property values are falling sharply while unemployment is sky-high.

Next, the Irish Prime Minister Brian Cowen promises a program for the recovery of the economy with a $1.04 billion venture capital fund to boost enterprises and re-orientate the economy toward what Cowen calls the “knowledge economy,” along with wind and hydro energy, according to The Age.

The Irish ETF experiencing the deleterious effect of an economic downturn:

• NETS ISEQ 20 Index (IQE): down 47.1% since Aug. 22 inception

In 2004, Ireland opened its doors to immigrants from former communist states to keep economic growth on the right path. But for the first time in 14 years, Ireland will see more people leave its land, with a majority of the exodus among the 170,000 workers who arrived in the past four years, reports Dara Doyle for Bloomberg.

The manufacturing and building booms that helped double the size of Ireland’s economy during the past 10 years made it the most dynamic in western Europe. The credit market freeze has taken the country to recession status and lifted unemployment to an 11-year high. RTE Business reports that the falloff in housing construction, high oil prices in the first half of 2008 and the global credit crunch will lead to a contraction in the Irish economy of 1.6% this year, the first decline in national income in 25 years.

Jonathon Saul for Forex Pros reports that economists expect Ireland’s recession to deepen next year, predicting a more than two percent contraction in the economy, with a recovery not even anticipated until 2010. Ireland is officially the first eurozone country to slip into a recession this year.

NETS ISEQ 20 Index (IQE) could reflect this fallout. It’s down 42.3% since its Aug. 22 inception.

Fears center on the fact that the bailout effects aren’t going to be seen immediately, sending the Dow Jones Industrial Average below the 10,000 mark for the first time in four years, reports Joe Bel Bruno for the Associated Press. Treasury Secretary Henry Paulson has pledged a rapid response to the crisis.

Meanwhile, the S&P 500 is just about back to where it was 10 years ago:

Over the weekend, European governments scrambled to boost failing banks. The German government agreed on a $68 billion bailout for a commercial property lender, while one French bank is bailing out another after a government bailout failed. The governments in Germany, Ireland and Greece also said they would guarantee bank deposits.

Paulson said that he’s going to name Neel Kashkari to oversee the U.S. bailout, Jessica Hall reports for Reuters. Kashkari, who will head the Office of Financial Stability, is a Treasury assistant secretary for international affairs and a former Goldman Sachs banker.

Economic fears continue to drag down oil and its related ETFs: it dipped below $90 a barrel for the first time in eight months, reports Stevenson Jacobs for the Associated Press. Prices have dropped nearly 40% since July. The U.S. dollar is showing new signs of life, too, aiding in the effort to bring down prices.

As of August, their economy continued to retract, with activity, backlogs, and employment all declining at record rates, reports The FinFacts team. Among the main findings of a survey include:

• A contraction of new orders, and a continuation in the downtrend of new orders. Volumes of new work fell for the ninth straight month.
• A record decline in activity at private sector firms.
• An increase in job losses, and a sixth straight month of falling employment.

Meanwhile, the Irish Minister of Finance is seeking to breach the Maastricht rules limiting government deficits in the eurozone and budget for a significant deficit next year to plan accordingly. Brian Lenihan is instructed to run a 5% deficit in 2009, in breach of the 3% rule, reports correspondent for The Irish Times.

IQE launched on June 16.

Figures released in mid-August showed that the euro-zone economy shriveled to an annualized rate of 0.8% during the second quarter. It was the biggest reversal since 2001.

Purchasing and manufacturing data are reflecting this slump, consumer confidence is low, and business confidence within the three largest European economies – Germany, France and Italy – is lagging, reports The Economist. Germany’s downturn is causing particular dismay, since it was one of the few countries that sidestepped the global house-price boom.

In general, the sentiment for the global credit crunch is blamed on America. Many Europeans, Germans in particular, feel that they do not deserve this reversal of fortune, as they did not create this situation. But one economist says that Germany profited from the credit-fueled boom and were part of the game.

Elsewhere in Europe, housing mania took hold, but Ireland’s bust might be the most dramatic of all. Its GDP grew 6% in 2007, but is on pace to shrink this year.

Euro inflation fell to 3.8% in August from a record high of 4% in June and July, offering some glimmer of hope.

• Vanguard Europe Pacific ETF (VEA), down 16.8% year-to-date
• BLDRs Europe 100 ADR Index Fund (ADRU), down 17.7% year-to-date
• Vanguard European ETF (VGK), down 17.8% year-to-date
• PowerShares FTSE RAFI Europe Portfolio (PEF), down 20.8% year-to-date
• PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD), down 21.6% year-to-date