BRUSSELS—The euro zone economy is heading into its second recession in just three years and the wider European Union will stagnate, the EU’s executive said on Thursday, warning that the currency area has yet to break its vicious cycle of debt.
The European Commission forecast that economic output in the 17 nations sharing the euro will contract 0.3 percent this year, reversing an earlier forecast of 0.5 percent growth in 2012. The wider, 27-nation European Union, which generates a fifth of global output, will not manage any growth this year. Battered Greece will enter its fifth year of economic contraction and Spain and Italy, which saw their financing costs pushed up to near unaffordable levels last year, will shrink by around 1 percent, it forecast. With the euro zone’s sovereign debt crisis moving from a chronic to an acute phase, the EU’s
top economic official warned that there would be little clemency for heavily-indebted countries who must meet strict budget targets even as their economies stall. There seemed to be some leniency when it came to Spain, however. “Member states facing close market scrutiny should be ready to meet budgetary targets,” said Economicand Monetary Affairs Commissioner Olli Rehn defending his strategy of tough love for countries that live beyond their means. But he suggested Spain’s 2 012 deficit target of 4.4 percent may be allowed to rise once all available data was gathered by the EU’s statistics agency Eurostat. “The full information of budgetary figures will be available in the March notification, which will be then validated and (published) by Eurostat in April. On that basis, we work with the Spanish authorities and decisions will be taken once we have a full picture,” Rehn said.
Economists are increasingly questioning the EU’s strategy for southern Europe as austerity reaches such extremes that some indebted town halls are unable to pay staff, social services shutter and joblessness reaches record levels. But the Commission said budget cuts were the way to regain investor confidence. “Negative feedback loops between weak sovereign debtors, fragile financial markets, and a slowing real economy do not yet appear to have been broken. Separately, European Central Bank President Mario Draghi told a German newspaper that the euro zone economy is bouncing back after a very weak end to last year and positive signals have increased since the ECB’s rate decision meeting two weeks ago. The euro zone was last in recession in 2009, dubbed the Great Recession worldwide, when the economy contracted 4.3 percent during the deepest global slump since the 1930s.—Agencies