The European Commission in its interim forecast report has warned that the European Union has yet to break its vicious cycle of debt, and the euro zone economy could be heading into its second recession in just three years, while the wider, 27-nation European Union, which generates a fifth of global output, will not manage any growth this year. According to the report, the 17 nations sharing the euro will see their economic output contract by 0.3 percent this year, against an earlier forecast of 0.5 percent growth in 2012. Inflation for the euro zone this year should be at around 2.1 percent, which according to the European Central Bank should help maintain stable prices and a healthy economy.
The International Monetary Fund, in a similar forecast has said output in the euro zone will dip 0.5 percent this year, which is a shade more optimistic than the European Commission report. But both of them agree that the currency zone will undergo a modest recovery in the final months of 2012. Economists polled by Reuters also expect growth to return in 2013.
“The EU is set to experience stagnating GDP this year, and the euro area will undergo a mild recession,” the Commission said.
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“Negative feedback loops between weak sovereign debtors, fragile financial markets, and a slowing real economy do not yet appear to have been broken,” the Commission said.
The euro zone last faced recession in 2009, dubbed the Great Recession worldwide, when the economy contracted 4.3 percent. But according to economists, inspite of the best efforts of the member countries to bring about a reversal, rising public debt, diminishing business confidence and high unemployment derailed the two-year recovery.
The forecasts is based on the assumption that EU leaders will act to resolve the sovereign debt crisis, but things could change drastically if they fail to reach an agreement to raise the ceiling of the euro zone’s joint rescue funds to help aid the heavily indebted southern European economies. And to make things worse, the absence of growth is widening the gap between the wealthy economies of northern Europe and those of the south that are most in need of growth to pay off debt.
“The interim forecast continues to rely on the assumption that adequate policy measures are decided and implemented,” the Commission said.
According to the report,Greecewill enter its fifth year of economic contraction andSpainwill shrink 1 percent. The euro zone’s two largest economies,GermanyandFrance, are likely to escape recession this year, growing 0.6 percent and 0.4 percent respectively.