Russia's President says he hopes ''common sense'' will prevail over the latest sanctions threat. With Germany's economy showing signs of running out of steam Ciara Lee asks if Europe can afford to hit Russia hard?
Use common sense - that's President Putin's latest warning to the West over the possibility of fresh sanctions against Russia. EU leaders are preparing new measures against Moscow. But no definite ones have been agreed yet or when they will be imposed. Anxiety over Ukraine is already hurting some of their economies - even Germany. The power house of the euro zone saw a contraction in the second quarter for the first time in over a year. Baader Bank's Robert Halver. (SOUNDBITE) (German) HEAD OF CAPITAL MARKET ANALYSIS AT BAADER BANK, ROBERT HALVER, SAYING: "We are seeing a battle: geopolitics versus monetary policies. The geopolitical aspect is explosive because it concerns the German and the European economy. Yet Europe wants to decide on sanctions against Russia later this week. This is not good for the DAX." Gross capital investment in Europe's biggest economy fell over 2 percent and construction investment dropped by 4 percent. Even foreign trade, traditionally the driver of German economic growth, was slightly down. But NAB's Tom Vosa says the problems aren't entirely related to Russia and Ukraine. (SOUNDBITE) (English) "It's possible that Germany will end up in a technical recession by the end of the third quarter. Europe is going to slow because of this no net export led growth. Europe was slowing anyway and I think Russian sanctions on top yes it will hurt. But the underlying picture was one of very weak European demand, an economy that was slowing and an ECB, which unfortunately having cut rates, may have left it a little too late." Italy also fell back into recession over the same period. And France - already in it - stagnated, with manufacturing activity falling at its fastest pace in 15 months. Overall euro zone manufacturing growth also slowed more than expected as new orders dwindled. It's all adding to Europe's dilemma over the sanctions - and that's without the region's reliance on Russian energy. They will be buoyed by one development though Australia is escalating its sanctions. It's banning arms exports and will deny state-owned Russian banks access to Australia's capital market.