The European Commission has cut its growth forecast for the EU to just 0.5% for 2012.

It says growth has now stopped in Europe and will not restart until mid-year.

Commissioner Olli Rehn said there is a risk of a new recession unless action is taken.

The forecast says Ireland’s economy will grow at 1.1% next year, the same as its estimate for 2011.

This is lower than the Government's estimate last week, which said the economy would grow by 1.5% next year.

The Commission says the stalled economy will mean no improvement in employment prospects in Europe next year, with unemployment remaining at 9.5%.

For Ireland it estimates unemployment at 14.3% compared with 14.4% this year.

Inflation for the EU is set to fall below 2% next year.

For 2013, the Commission says the EU should grow at 1.5%, while it expects Irish growth at 2.3%.

It forecasts Irish debt GDP to peak in 2013 at 121% on a no policy change basis.

The Government forecast last week said it would peak at 118%.

Germany dismisses report of smaller eurozone

The German government is not pursuing the idea of a smaller eurozone and its policies are focused on stabilising the currency bloc as a whole, Chancellor Angela Merkel's spokesman has said.

The statement came in response to a Reuters story that said some German and French officials had discussed moving ahead with tighter economic integration, possibly in a smaller group of countries.

"The German government is most definitely not pursuing such plans," spokesman Steffen Seibert said.

"On the contrary, our policies are aimed at stabilising the eurozone in its entirety and attacking the root of its problems," he added.

US President Barack Obama spoke separately with his German and French counterparts today about the European financial crisis, the White House said.

The conversations with German Chancellor Angela Merkel and French President Nicolas Sarkozy were in addition to a call he made to Italian President Giorgio Napolitano to express his confidence in Napolitano's leadership, the White House said.

On Tuesday, Mr Sarkozy said a two-speed Europe - the eurozone moving ahead more rapidly than all 27 countries in the EU - was the only model for the future.

Mrs Merkel had said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait.

She called for changes in EU treaties and said ''it is time for a breakthrough to a new Europe."

To an extent the taboo of a country leaving the 17-member currency bloc was already broken at the G20 summit in Cannes last week.

There, German Chancellor Angela Merkel and Mr Sarkozy both effectively said that Greece might have to drop out if the eurozone's long-term stability was to be maintained.

Tánaiste Eamon Gilmore has said that Ireland will remain in the eurozone even if France and Germany go ahead with their own plans.

He said both he and the Irish Government very much agreed with Commission President José Manuel Barosso, who had made it very clear that individual countries should not be going off on what he called solo runs.