Europe faces tipping back into recession over the course of 2012, the EU's economic commissioner Olli Rehn said today due to a "vicious circle" of government debt, vulnerable banks and collapsed spending.
"Growth has stalled in Europe, and there is a risk of a new recession," Rehn said as the EU released detailed forecasts for the euro zone and broader economy for the next two years, with GDP "now projected to stagnate until well into 2012."
The EU said that growth across the euro zone in 2012 will collapse to 0.5%, a steep drop from its previous forecast of 1.8%.
The commission has forecast that 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, with a further decline in employment of 0.6%.
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%.
The EU also said that the Italian economy will virtually stagnate in 2012 with growth of just 0.1%, as the debt crisis engulfed the euro zone's third biggest economy. The commission said the Italian public deficit will reach 2.3% next year, below the euro zone's ceiling of 3% but well off the government's 1.6% target.
Olli Rehn said that Italy's soaring borrowing costs threaten to impact the country's economy next year.
"While in the very short term the impact on the sovereign is not as so dramatic, relatively soon, towards next year and the medium term, this would have a significant impact on the financing conditions and thus also growth of the real economy," the EU Economic Affairs Commissioner said.
Britain's economy will also expand at a sharply lower pace in 2011 and 2012, growing by 0.7% this year and 0.6% next year, the European Commission said today. A previous EU forecast had foreseen growth of 1.7% in 2011 and 2.1% in 2012.
Belgium and four others face EU fines on deficits
Belgium was handed an urgent warning from Brussels today to get its public finances back on track and deliver a 2012 budget cutting its deficit by the middle of next month.
Econonic Affairs Commissioner Olli Rehn singled out Belgium along with Cyprus, Hungary, Malta and Poland as five EU states at risk of missing a previously agreed 2012 deadline to return their annual deficits to under 3% of GDP - a threshold enshrined in EU law.
"Very clearly Belgium needs to step up efforts to meet fiscal targets for next year," Rehn said. "Convincing revisions of permanent fiscal measures and 2012 budgets should be available by mid-December," he added.
The commission as of next month will be able to resort to a so-called "six-pack" of new laws to sanction Belgium if its incoming government fails to meet the targets.
Rehn said he issued finance ministers from the five countries with "an early warning" during talks in Brussels earlier this week and was "sending letters to the five countries today."
He said Belgium was off-target this year and that next year - the "deadline for correcting its deficit" - would see a projected figure of 4.5%.
Detailed forecasts for the whole of Europe showed that Belgium's economy is now expected to grow by 0.9% next year, as against the 2.2% previously predicted by the EU six months ago.
Poland, which has long argued its deficit figures are inflated by the need to meet EU standards on pensions, is again tipped to be one of the bloc's best performers with growth of 2.5%.
