News Service from House Harris

EUR: Europe to suffer deep recession, surging unemployment: EU

BRUSSELS, Jan 19 AFP - The EU economy will shrink nearly two per cent this year as one of the worst recessions on record drives unemployment and government deficits to levels not seen for years, the European Commission forecast on Monday.

After growing one per cent in 2008, the 27-nation economy of the European Union is poised to contract by 1.8 per cent this year, the EU's executive arm said in a dramatic downward revision of its forecasts.

Predicting that the roots of recovery will only take hold in the middle of the year, the commission forecast that the EU would achieve economic growth of just 0.5 per cent in 2010.

The outlook was marginally worse for the 16 countries sharing the euro, which the commission forecast would see their combined economy shrink 1.9 per cent this year after growing 0.9 per cent in 2008.

The forecast marked a severe downward revision from the commission's last estimate in November, when it predicted the eurozone economy would eke out growth of 0.1 per cent.

With the economy suffering from a 9.2 per cent drop in business investment this year, it too would only begin picking up in the middle of the year before managing to grow 0.4 per cent in 2010.

At the same time, unemployment will climb to levels not seen in Europe for over a decade as joblessness becomes once again a major headache for workers and politicians.

The commission forecast that the eurozone jobless rate would rise from 7.5 per cent in 2008 to 9.3 per cent this year and hit 10.2 per cent in 2010 - over the 10 per cent mark for the first time since 1998.

With their economies in a tailspin, European governments pledged in December to pump a combined 200 billion euros ($A391.9 billion) into a Europe-wide economic stimulus package.

However, some governments, including that of economic powerhouse Germany, have already come out with plans since then for even more stimulus or are considering doing so.

Germany was expected to contract by 2.3 per cent this year and stall next year despite Berlin's latest efforts to revive Europe's biggest economy.

"When Germany coughs we all catch a cold," said Dutch Finance Minister Wouter Bos as he arrived for a meeting with his eurozone counterparts in Brussels.

"The great unknown is whether any of the intervention packages, both those that aim at the financial sector and those that aim at the real economy, prove to be effective," he said, adding that it was too early to begin talking of additional stimulus plans.

As governments commit billions to trying to revive their economies and bail out their banks, public deficits will swell, ballooning in the eurozone from 1.7 per cent of output in 2008 to four per cent in 2009 and 4.4 per cent in 2010.

However, the commission warned that some countries would see much more dramatic downturns than others, with the financial crisis and housing market crashes taking a heavy toll on the Irish and Spanish economies in particular.

Spain will see its unemployment rate soar from 11.3 per cent in 2008 to 16.1 per cent in 2009 and a stunning 18.7 per cent in 2010 while Ireland will see its public deficit explode from 6.3 per cent in 2008 to 11 per cent in 2009 and 13 per cent in 2010.

The huge jumps in government deficits has prompted credit rating agency Standard and Poor's to cut its rating on Greece and Spain's debt.

The CTK Czech news agency reported from Prague that the EU's Czech presidency would propose at a meeting on Tuesday of the bloc's finance ministers to follow economic stimulus plans with a coordinated effort to rein in deficits once the economy improves.

In normal times, EU countries are supposed to keep their deficits to less than three per cent of output under European rules.