Modest eurozone recession predicted

The 17-nation eurozone economy will suffer a modest recession this year despite recent signs of stabilisation, particularly in financial markets, the European Union’s executive branch said today.

In its latest projections, the European Commission forecast a 0.3% contraction in the eurozone economy, with Greece leading the way downwards with a massive 4.4% decline.

That would be the fifth straight year of recession in Greece, which earlier this week clinched its second massive bailout package in less than two years.

Of the three bailed out countries - Ireland, Greece and Portugal - only Ireland offered some glimpse of hope. While Greece and Portugal were expected to remain in deep recessions, Ireland’s economy was forecast to grow 0.5% this year, on top of 2011’s 0.9% growth.

In its last forecast in November, the Commission predicted a 0.5% expansion across the eurozone economy following last year’s 1.4% growth. The difference this time is that it now expects the economies of Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia to contract in 2012, not just Greece and Portugal.

The overall decline is limited by resilient activity in Germany and France, the eurozone’s two largest economies. Growth in Germany is expected to be 0.6% while France is forecast to grow by 0.4%.

“Although growth has stalled, we are seeing signs of stabilisation in the European economy,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs. “Economic sentiment is still at low levels, but stress in financial markets is easing.”

He said the forecast was based on the assumption that uncertainty created by the debt crisis “will gradually fade away”.

Last November, financial markets were struck by fears that Europe’s debt crisis would not be confined to the relatively small economies of Greece, Ireland and Portugal. Worries grew that Spain and Italy could get swamped by their debt loads, too. Both countries now have new governments to enact sweeping austerity measures.

The more benign atmosphere in financial markets has also been helped by the European Central Bank’s offering of super-cheap long-term loans to banks and the decision of the 17 euro countries to tie their economies closer together.

Though austerity measures are the main pillar in Europe’s strategy to fight the debt crisis, they are clearly hurting the economy in the short term – Spain and Italy are expected to sink into recession this year as their governments cut debt aggressively.

Spain is expected to contract 1% in 2012, against the 0.7% growth predicted in the autumn. The Commission warned that if the Spanish government enacts further budget cuts in an effort to meet its 2012 targets, its economy will likely shrink even more.

Italy is predicted to contract by 1.3% this year, in contrast to the 0.3% growth predicted in November.

Mr Rehn said many of the measures being taken across Europe are “essential” for financial stability and to establish conditions for more sustainable growth and job creation.

“With decisive action, we can turn the corner and move from stabilisation to boosting growth and jobs,” he said.

The wider 27-nation EU, which includes non-euro countries, is expected to post flat growth this year. Britain is forecast to grow 0.6%, while Poland is expected to post a 2.5% expansion, the highest rate across the EU.