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Recession threatens in 2012, EU warns

Recession threatens in 2012, EU warns

Forecast

(BRUSSELS) - Europe faces a new recession next year, the EU's economy chief Olli Rehn said on Thursday due to a "vicious circle" of government debt, vulnerable banks and weak spending.

"Growth has stalled in Europe, and there is a risk of a new recession," Rehn said in releasing detailed forecasts for the eurozone and broader economy for the next two years, with gross domestic product (GDP) "now projected to stagnate until well into 2012."

Economic output across the key, debt-laden eurozone next year will collapse to 0.5 percent, Rehn's office said in a vast annual survey of expectations, a steep drop from its previous forecast of 1.8 percent.

To have any chance of avoiding the return to recession -- a sustained six-month period where the economy contracts -- over the course of the year, Rehn said European Union governments beginning with Italy would have to ensure "unwavering implementation" of reforms.

"The weakening real economy, fragile public finances and the vulnerable financial sector appear to be mutually affecting each other in a vicious circle," his office said.

It cited "sovereign debt worries, the financial industry and world trade," threatened by a retreat, and "a potential for negative dynamic interactions" wrecking all prospect of job creation over the next year.

The main threats from the debt crisis each contribute pointedly to the gloomy outlook.

The Italian economy will virtually stagnate with growth of just 0.1 percent, and while the EU tips the Italian public deficit will come back in under the 3.0-percent threshold enshrined in EU law at 2.3 percent -- but that is well off the Rome government's 1.6 percent target.

Meanwhile, the European Union has abandoned all hope of emergence from recession next year for Greece as its political leaders strive to meet conditions set by its EU and IMF protectors to receive a second bailout of 230 billion euros ($310.5 billion).

The previous EU forecast of 1.1-percent growth had been ripped up -- with a 2.8 percent contraction now expected in 2012 after a brutal 5.5-percent recession this year.

Outside the euro currency area, heavyweight Britain -- another hugely-indebted state -- will see its economy expand at a sharply lower pace of just 0.6 percent next year, way down from the 2.1 percent anticipated in an equivalent interim forecast six months ago.

Key figures from Europe's bleak economic outlook

European Economic Forecast - autumn 2011


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