Debt crisis will pull eurozone, neighbors into double-dip: EU

By Roddy Thomson ,AFP

BRUSSELS — The debt crisis will drag the eurozone into a long-feared double-dip recession this year, pulling down most neighboring non-euro economies in its wake, the EU said Thursday. New data predicted a 0.3-percent contraction in GDP throughout 2012, compared with the previous estimate of 0.5-percent growth, indicating that deep challenges remained for the single currency area only days after a decision to mount a new 237-billion-euro (US$310 billion) bailout of Greece. “The unexpected stalling of the recovery in late 2011 is set to extend into the first two quarters of 2012,” the European Commission said Thursday although it stressed it saw a “mild recession with signs of stabilization.” Three years after the collapse of U.S. mortgage markets plunged the world into a brutal downturn, the Commission said negative loops “between weak sovereign debtors, fragile financial markets and a slowing real economy do not yet appear to have been broken.” Comments from close watchers of EU economic policy were swift and harsh. “The banking system, at least in the euro area, remains on life support; the politics in the euro area remain as fraught as ever and the social fabric is being stretched to its limit,” said Sony Kapoor of Brussels-based economic consultancy Re-Define. Announcing the numbers, European Union Economy Commissioner Olli Rehn put the figures into context by comparing the eurozone prospects to overall global growth which he expected to be 4.3 percent this year. “Although growth has stalled, we are seeing signs of stabilization,” he said. “Economic sentiment is still at low levels, but stress in financial markets is easing.” “With decisive action, we can turn the corner,” Rehn added. Unusually, the EU executive fed in data from all 27 EU states — not just the seven biggest — in a bid to make its forecasts more robust. The European Commission said “modest growth is predicted to return in the second half of the year,” with inflation revised “slightly upwards” to 2.1 percent across the 17-state euro currency area, mainly due to energy costs and “increases in indirect taxes.” The Commission said the Greek economy would shrink 4.4 percent this year, much worse than its previous estimate of a 2.8 percent recession. The Greek government is now rushing to nail down a 107-billion-euro write-down of private debt and fresh loans of 130 billion euros or more from international backers. The parliament in Athens approved on Thursday a law on the historic writedown and now turn to legislation on the further austerity cuts and tough targets required to get the loans. On financial markets European stocks fell, with traders cautious about the prospects of Greece overcoming its debt problems on such weak growth.

The euro firmed against the dollar and yen. Meanwhile, the EU Commission warned that Italy, which carries the eurozone’s biggest debt burden of about 1.3 trillion euros, faces a recession that will cut its output by 1.3 percent in 2012. The last official forecast in Rome was for a 0.4-percent contraction, although the Bank of Italy last month tipped between 1.2 percent and 1.5 percent, while the IMF predicted an even worse result, a 2.2-percent drop. There will be a 1.0-percent recession in Spain, according to the data, but Germany’s economy would grow 0.6 percent and that of France 0.4 percent.

Outside the eurozone, Poland maintains its position as a powerhouse economy, with 2.5-percent growth now forecast — lower compared to a stellar performance prior to the debt crisis, but still way out in front. The economy in Britain, which has its own lopsided patterns, was meanwhile tipped to grow by 0.6 percent. In a clear sign of structural divergences, the Commission noted that “Greece, Portugal and Spain account for 95 percent of the rise in unemployment in the EU since late 2010.”