The European Commission has warned that economic growth in the euro zone will come to a near standstill by the end of the year due to the European debt crisis and the turmoil in financial markets.
In its latest economic forecast, the Commission said the soft patch is likely to persist until spring next year but that a double dip recession would not result. The area's economic outlook has "deteriorated", the European Commission added.
The economy in the single currency area is still expected to expand by 1.6% in 2011 despite the slowdown, thanks to stronger-than-expected growth in the first half of the year, the EU's executive arm said.
Growth is projected at 0.2% in the third quarter and a mere 0.1% in the last quarter of 2011, down 0.2 and 0.3 percentage points respectively from a previous forecast.
"The outlook for the European economy has deteriorated," EU Economic Affairs Commissioner Olli Rehn said, unveiling the European Commission's interim economic forecast. The economy is "expected to come to a virtual standstill" by the end of the year, Rehn said.
"Recoveries from financial crises are often slow and bumpy. Moreover, the EU economy is affected by a more difficult external environment, while domestic demand remains subdued," he said.
"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy," Rehn added.
The Commission also released growth prospects for Europe's top seven economies. Germany is the only country for which the forecast improved, with the commission projecting growth of 2.9% this year, up from 2.6% predicted in May.
The French economy is now expected to expand by 1.6% instead of 1.8%, while the forecast for Italy, a country under pressure from the markets over its high debt, was revised down to 0.7% from 1%. The Netherlands will see growth of 1.6%, down 0.3-points from the previous forecast, while Spain's economy is still believed to grow by 0.8%.
Outside the euro one, Britain's growth forecast was revised down to 1.1% from 1.7% while Poland's prospects remain bright at 4%.
The European Commission said that weakenining global demand and trade over the summer, and signs that the recovery lost steam in the US, contribute to Europe's economic slowdown.
"Hopes that the sovereign debt crisis would gradually fade were disappointed," the commission's report said, referring to sharp falls in the stock markets in August over fears that Italy and Spain could be next in line to request bail-outs.
"Financial market conditions deteriorated sharply over the summer on the back of sovereign debt concerns in the euro area and anxiety about the outlook for growth and fiscal sustainability in the US," the report said.
The EU Commissioner for Economic and Monetary Affairs said today that the reduction in Ireland's bail-out interest rate will significantly contribute to the sustainability of the country.
Olli Rehn said the Irish economy is turning around. But he declined to specify what additional measures the Commission would like the Government to take, such as the sale of state assets or expenditure cuts.
Euro zone inflation to ease to 2.5% in 2011
Inflation in the euro zone will ease gradually to 2.5% in 2011, the European Commission forecast today as consumer prices remain higher than the European Central Bank's threshold.
Inflation "seems to have peaked in the second quarter of 2011" when it was partly fuelled by high energy prices, the European Commission said in an interim forecast.
"With weaker economic growth going forward, inflation in the EU and the euro area is also now expected to moderate slightly more quickly, reaching respectively 2.9% and 2.5% for the year as a whole, and remaining above 2% until the end of 2011," the report said.
The ECB considers 2% the best level for price stability in the single currency area.
Separately, the Eurostat data agency said euro zone inflation remained stable in August at 2.5%, the same level as July.
