Double-dip recession setting in across eurozone—EU

BRUSSELS—The debt crisis will drag the eurozone into a long-warned double-dip recession this year, pulling down most neighboring non-euro economies in its wake, the EU said Thursday.

Fresh after a decision to mount a new 237-billion-euro ($310 billion) bailout of Greece, there was more bad news for the currency area when updated EU data predicted a 0.3-percent contraction in GDP throughout 2012, compared with a forecast in November of 0.5-percent growth for this year.

“The unexpected stalling of the recovery in late 2011 is set to extend into the first two quarters of 2012,” the European Commission said Thursday although it stressed it saw a “mild recession with signs of stabilization.”

Three years after the collapse of US mortgage markets plunged the world into a brutal downturn, the Commission said negative loops “between weak sovereign debtors, fragile financial markets and a slowing real economy do not yet appear to have been broken.”

A 0.8-percent downward revision in the space of just over three months underlined the importance of forecasting for the likes of Greece, where wide variations were presented to finance ministers this week as they took decisions on long-term debt sustainability in that country.

Comments from close watchers of EU economic policy were swift and harsh.

“The banking system, at least in the euro area, remains on life support; the politics in the euro area remain as fraught as ever and the social fabric is being stretched to its limit,” said Sony Kapoor of Brussels-based economic consultancy Re-Define.

Announcing the numbers, European Union Economy Commissioner Olli Rehn put the figures into context by comparing the eurozone prospects to overall global growth which he expected to be 4.3 percent this year.

Rehn also admitted that the turnaround anticipated later in the year “remains to be confirmed in coming months and will depend on policy decisions taken” by governments.

Unusually, the EU executive fed in data from all 27 EU states – not just the seven biggest – in a bid to make its forecasts more robust.

The European Commission said “modest growth is predicted to return in the second half of the year,” with inflation revised “slightly upwards” to 2.1 percent across the 17-state euro currency area, mainly due to energy costs and “increases in indirect taxes.”

A fifth year of recession in Greece is now expected by Brussels to result in a 4.4-percent contraction of gross domestic product in 2012.

As the Greek government pursues a 107-billion-euro write-down of private debt and fresh loans of 130 billion euros or more from international backers, the figure was, however, better than the 5.5-percent slide forecast in December by Prime Minister Lucas Papademos.

In Athens, lawmakers focused Thursday on a crucial debate to approve bills to restructure the country’s massive debt of 350 billion euros.

On financial markets European stocks wavered Thursday, with traders welcoming strong German confidence data but cautious about the prospects of Greece overcoming its debt problems.

The euro firmed against the dollar and yen.

Meanwhile, the EU Commission warned that Italy, which carries the eurozone’s biggest debt burden of about 1.3 trillion euros, faces a recession that will cut its output by 1.3 percent in 2012.

The last official forecast from the government in Rome was for a 0.4-percent fall, although the Bank of Italy last month tipped between 1.2 percent and 1.5 percent, while the IMF predicted an even worse result, a 2.2-percent drop.

There will be a 1.0-percent recession in Spain, according to the data, but Germany’s economy would grow 0.6 percent and that of France 0.4 percent.

Outside the eurozone, Poland maintains its position as a powerhouse economy, with 2.5-percent growth now predicted – dimmed compared to stellar performance prior to the debt crisis, but still way out in front.

“One essential reason is Poland has been benefiting from the engine of the German economy, it has had a positive spillover,” Rehn said, also crediting a large influx of EU funding for Warsaw.

The economy across the United Kingdom, which has its own lopsided patterns, was, meanwhile, tipped to grow by 0.6 percent.

“Although growth has stalled, we are seeing signs of stabilization,” Rehn said, highlighting “easing” stress in financial markets.

The Commission cited a “less supportive” global economy “weighing on net exports” as well as low business and consumer confidence, although the forecast maintained that “a credit crunch has been avoided.”

In a clear sign of structural divergences, the Commission noted that “Greece, Portugal and Spain account for 95 percent of the rise in unemployment in the EU since late 2010.”