Europe faces drawn-out, painful economic recovery

(BRUSSELS) - Europe's economic prospects have dimmed considerably, new EU forecasts showed Wednesday, pointing to a drawn-out and painful recovery before any return to growth.

Record and mounting unemployment, much weaker projections for next year and only a muted improvement in 2014 are, however, the price to pay for stabilising public finances and re-balancing the economy, the European Commission argued.

Restoring countries to health after years of both internal and external imbalances takes time and the measures required dampen growth but there has been progress, it noted.

Further progress in fixing strained public finances "is underpinning this rebalancing process," the commission said.

After years of over-spending, austerity and violent protests, the Commission found enough positives to conclude that Greece should finally emerge from seven years of recession in 2014.

The Commission said eurozone growth next year would come in at just 0.1 percent, whereas six months ago, it was tipping a much stronger recovery of 1.0 percent.

It said gross domestic product (GDP) across the 17-state currency area would shrink 0.4 percent in 2012 and would take until 2014 to recover, with expected growth then of 1.4 percent.

"Europe is going through a difficult process of macro-economic rebalancing, which will still last for some time," EU Economic Affairs Commissioner Olli Rehn said in a statement, but there should be a gradual pick-up "from early next year."

The Commission expected the United States to far outstrip Europe, with steadily-increasing growth above the two-percent mark going forward.

Rehn said there was still a risk that unemployment -- put at nearly 12 percent next year in the eurozone -- could undo progress on financial markets where the pressures on government borrowing rates have eased in the past few months.

With inflation next year forecast to "fall below two percent," the core target underpinning eurozone-wide economic planning, Rehn said decisions taken at some two dozen crisis summits had "laid the foundations for strengthening confidence."

But with struggling Spain and Italy expected to remain mired in recession this year and next, Rehn said "there is no room for complacency.

"Europe must continue to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth," he added.

Only a continuation of hardline policies putting the focus on greater economic and fiscal integration could "bring unemployment down from the current unacceptably high levels," he said.

Greece meanwhile should see 0.6-percent growth in 2014, the Commission said, as the country faces a key turning point later Wednesday when lawmakers vote on new austerity measures agreed in return for urgently needed bailout funds.

The Greek economy has shrunk by around a fifth since the crisis first broke and the Commission forecasts were notably stronger than those of the government which expects 0.2 percent in 2014, 2.5 percent in 2015 and 3.5 percent come 2016.

Greece, like Spain, faces crippling levels of unemployment as the very austerity measures adopted to fix their debt crisis also undercut demand.

In Spain, the bursting of a property bubble in 2008 and the near collapse of the banks has forced Madrid to tighten the purse strings, sending unemployment soaring to around 25 percent. It will hit more than 26 percent next year, according to the Commission.

Falling further behind euro anchor Germany -- tipped to run roughly balanced budgets between now and 2014 -- France will have a public deficit of 3.5 percent of gross domestic product (GDP) in 2013, compared with its own target of 3.0 percent.

"Prospects for an imminent recovery have waned," the Commission said, citing rising unemployment and tax hikes, adding that "French companies are set to continue to lose export market shares."

Country growth forecasts - detailed figures

European Economic Forecast 
Autumn 2012: sailing through rough waters