Economic decline sweeps eurozone ahead of G20

Manufacturersacross Europe provided more alarming evidence of the fallout from the sovereign debt crisis on the eve of the Cannes G20 summit today after the biggest slump for more than two years.

Every nation in the eurozone barring Ireland saw manufacturing shrink in October, with even powerhouse Germany succumbing to its first decline since September 2009, according to financial information firm Markit. Separate figures also showed German dole queues lengthening for the first time in two years.

The dire news stokes fears that the crisis is tipping the Contintent back into recession. It came as Greek premier George Papandreou - who enraged European leaders and sent markets into freefall by calling a referendum on the nation's second bailout - faced crunch talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy ahead of the summit.

Markit's survey showed an even bigger slide for manufacturers than first feared, with struggling Italy suffering its biggest fall in manufacturing output in the history of its survey. Greece, Italy and Spain bore the brunt of the worst slump in new orders since May 2009.

The prospect of a referendum and a confidence vote in Papandreou's fragile government on Friday meanwhile threatens to unravel the deal struck by European leaders last week and raises the nightmare scenario of Greece crashing out of the euro.Greece's borrowing costs jumped today as markets took fright.

CMC Markets analyst Michael Hewson said: "There were four wheels back on the wagon last week, two have just fallen off. Papandreou will be told: this is the plan, take it or leave it. The trouble is, even if he loses the confidence vote on Friday, it will be very difficult for another government to turn around and say that we are not having a referendum."

Jonathan Loynes, chief European economist at Capital Economics, said the European Central Bank could move to cut rates as soon as tomorrow at Mario Draghi's first meeting as president. He said: "The chances of a rate cut have increased since yesterday. It's pretty clear they should be cut. The difference between 1.5% and 1.25% or 1% is small but anything that can help at the margins should be welcomed."