The eurozone is heading towards a “mild recession”, according to updated European Commission forecasts, and will contract by 0.3% in 2012.
This is the second recession in just three years, the EU's executive said today (23 February), warning that the currency area has yet to break its vicious cycle of debt.
?“Europe has entered into a mild and temporary recession but … there are signs of recovery,” said Olli Rehn, EU economic and monetary affairs commissioner. “The temporary weakening of global demand we were expecting is still going on,” he added.
The Commission forecasts that economic output in the 17 nations sharing the euro will contract 0.3% this year, reversing an earlier forecast of 0.5% growth in 2012.
The wider, 27-nation EU, which generates one-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%.
With the eurozone'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.
"Member states facing close market scrutiny should be ready to meet budgetary targets," Rehn said, defending his strategy of tough love for countries that live beyond their means.
But he suggested Spain's 2012 deficit target of 4.4% may be allowed to rise once all available data are 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.
The eurozone was last in recession in 2009, dubbed the Great Recession worldwide, when the economy contracted 4.3% during the deepest global slump since the 1930s.
Adding to the difficulties, the downturn 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.
Germany and France, the eurozone's two largest economies, are likely to escape recession this year, growing 0.6% and 0.4% respectively, the Commission said.