The 15 countries using the euro have slumped into a shallow recession in the face of the worst financial crisis in generations, the European Commission estimates today.
After growing 0.7% in the first quarter, the euro zone economy shrank 0.2% in the second quarter and is set to contract by 0.1% in both the third and fourth quarters, according to the commission's forecasts.
The slump marks the first recession, which economists define as two quarters running of economic contraction, since the euro zone was created in 1999.
In a broad downgrade of its forecasts, the commission estimated that for the whole of 2008 the euro zone economy would expand 1.2% before slowing to growth of only 0.1% in 2009.
'The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumer confidence,' said EU Economic Affairs Commissioner Joaquin Almunia.
The European Commission also forecast a short, shallow recession for the whole EU, predicting the combined economy of the bloc would shrink by 0.1% in both the third and fourth quarters of 2008.
For the whole of 2008, the EU's executive arm forecast that the 27-nation economy would grow 1.4% and eke out growth of 0.2% in 2009.
In the face of sharply slowing growth, the commission forecast that unemployment would return as a major headache in Europe after a steady decline in recent years.
It predicted that the unemployment rate in the euro zone would creep up from a record low of 7.2% in March to 8.7% in 2010. Long the bane of European politicians, unemployment had been gradually falling in recent years but began creeping higher in April from a record low of 7.2% in March.
Meanwhile, the economic slowdown would also take its toll on public finances driving deficits in the euro zone as a percentage of output from 1.3% this year to 1.8% in 2009.
However, some countries would be far over the average with France's deficit hitting the 3% limit allowed by EU rules this year and breaching it next year with a deficit of 3.5%.
Some relief would come in the form of lower inflation which the commission said had peaked since commodity prices had fallen in the middle the year. It forecast that annual inflation in the euro zone would reach 3.5% in 2008 before easing back to 2.2% in 2009 and 2.1% in 2010.
If confirmed, that would bring the inflation rate much closer to the European Central Bank's comfort zone of close to but less than 2%, giving more scope for a series of rate cuts in the face of weak growth.
Long the bane of European politicians, unemployment had been gradually falling in recent years but began creeping higher in April from a record low of 7.2% in March.