Europe s recession deeper than expected

May 4, 2009

, BRUSSELS, May 4 – Europe will suffer a deeper and longer recession than previously thought, the European Commission warned Monday, forecasting that mass unemployment would return to haunt the continent.

Mired in the worst recession since World War II, the economies of both the European Union and the 16-nation eurozone were forecast to contract 4.0 percent this year and continue shrinking in 2010.

The estimate marked a dramatic downgrade of the European economic outlook after the commission forecast in January that the eurozone economy would shrink only 1.9 percent and the EU economy 1.8 percent.

Despite some "positive signals," the EU\’s executive arm estimated that the recession would drag into 2010 when both the eurozone and EU economies would shrink another 0.1 percent and warned that the figures could be even worse.

In its last forecasts from January, the commission had predicted that the 16 nations using the euro would eke out growth of 0.4 percent in 2010 and the 27-nation EU 0.5 percent.

"The European economy is in the midst of its deepest and most widespread recession in the post-war era," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

Despite the dramatic deterioration in the European outlook, he cautiously highlighted recent improvements in some economic data, suggesting the slump may be stabilising.

"We are no longer in a freefall, but even if some positive signals are appearing we do not have the critical mass of data to say that we are out of the woods," he told a news conference in Brussels.

Europe\’s biggest economy, export-dependent Germany, was expected to contract by 5.4 percent this year as foreign demand for German products dries up.

Many smaller countries were likely to see even worse recessions, with Latvia due to suffer a stunning 13.1-percent contraction in its economy this year while the once-booming Irish economy is seen shrinking 9.0 percent.

Although recovery plans were expected to begin boosting limp economic activity, Europe was set to see a dramatic rise in unemployment to record levels not seen since the end of World War II.

Mass unemployment could return to haunt Europe with some 8.5 million Europeans expected to lose their jobs in 2009 and 2010, driving the jobless rate in the eurozone to 11.5 percent in 2011 and 10.9 percent in the EU.

Government efforts to prop up slumping economies were also expected to weigh heavily on public deficits, which are projected to rise on average to 7.5 percent of gross domestic product in the EU next year.

This year, 21 out of the 27 EU countries are expected to have deficits in breach of the three-percent limit they are bound to respect.

Despite improving data in recent weeks, the commission warned that a worst case scenario could not be ruled out, especially if the crisis deepened.

Still Almunia was confident that the billions of euros European governments are pumping into their economies would help revive them in the months ahead.

"The ambitious measures taken in these exceptional measures are expected to put a floor under the fall in economic activity in middle of this year and allow the start of recovery at the beginning of next year," he added.

EU countries have economic stimulus measures underway worth 1.8 percent of gross domestic product in 2009 and 2010 although the figure is much higher when accounting for automatic increases in unemployment benefits as well.

Almunia said that "it\’s a bit early to say whether additional action is needed or not" but that EU leaders would broach the question at a summit next month.

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