The euro-area economy contracted the most in almost four years in the fourth quarter as trade and investment declined.

Gross domestic product in the 17-nation euro area fell 0.6 percent from the third quarter, the European Union’s statistics office in Luxembourg said on Wednesday, confirming an initial estimate published on Feb. 14. In the year, the economy shrank 0.9 percent.

The European Central Bank will maintain its benchmark interest rate at 0.75 percent on Thursday with the euro area mired in a recession and political instability in Italy after an inconclusive election, according to the median of 61 economists’ estimates in a Bloomberg News survey. The ECB will also update its economic forecasts.

“From the economic point of view you could justify a rate cut now or in the coming month, but at the same time we also do see that political complacency has joined the game again,” Carsten Brzeski, senior economist at ING Group in Brussels, said on March 4. “The ECB would be very hesitant to do something as long as we have this new political uncertainty in Italy.”

The euro-area economy has contracted for three straight quarters, a trend that will continue in the first three months of 2013, according to a separate Bloomberg survey of economists.

Italian election

Italian voters in a Feb. 24-25 election rejected the German-inspired austerity put into practice by outgoing Prime Minister Mario Monti, denying a majority in parliament to front- runner Pier Luigi Bersani and throwing the country into political chaos. Monti blamed crisis-management mistakes at the European level for his defeat.

“Austerity doesn’t work; the impact on Italian consumers is catastrophic,” Sergio Marchionne, chief executive officer of Italian carmaker Fiat SpA, said on March 5 at the Geneva Motor Show. “I understand austerity, but we can lose weight until we die.”

Gross fixed capital formation dropped 1.1 percent from the previous three months, when it fell a revised 0.8 percent, Wednesday’s report showed. Consumer spending was down 0.4 percent, while government spending slipped 0.1 percent.

Exports from the euro area declined 0.9 percent after a 1 percent gain in the third quarter. Imports also dropped 0.9 percent.

Austerity backlash

In Germany, Europe’s largest economy, GDP fell 0.6 percent in the fourth quarter, compared with a 0.2 percent increase in the previous three months. France’s economy contracted 0.3 percent, while Italy’s GDP dropped 0.9 percent. Spain’s economy shrank 0.8 percent.

As euro area finance ministers meeting in Brussels earlier this week grappled with Italy’s austerity backlash and a bailout request from Cyprus, German Chancellor Angela Merkel indicated that she is sensitive to criticisms that budget cutting has been overdone.

“We’ve done a lot to stabilize the euro,” Merkel said in Hanover on March 4. “We’ve done quite a bit to consolidate budgets, but we always have this discussion about growth, and don’t quite have the answers for where the growth should come from.”

[Bloomberg]