Ireland disciplined

The commission said the economic slowdown would also take its toll on public finances, driving deficits in the eurozone as a percentage of output from 1.3 per cent this year to 1.8 per cent in 2009.

However, some countries would be far over the average with France's deficit hitting the three per cent limit allowed by EU rules this year and breaching it next year with a deficit of 3.5 per cent.

Almunia said the commission would be launching disciplinary action against Ireland in the coming weeks for allowing a sharp deterioration in its public finances.

The commissioner said: "We will start the procedures to open an excessive deficit procedure with a recommendation to correct the deficit in the coming weeks.".

Ireland, which has long run budget surpluses, will see its public finances swing deep into deficit this year with a shortfall equal to 5.5 per cent of output, the commission estimated.

'Situation precarious'

In a broad downgrade of its estimates, the EU's executive arm forecast a short, shallow recession for the eurozone, predicting the bloc's combined economy would shrink by 0.1 per cent in both the third and fourth quarters of 2008.

The commission forecast that annual eurozone inflation would reach 3.5 per cent in 2008 [EPA]
For the whole of 2008, the commission forecast that the  27-nation economy would grow 1.4 per cent and eke out growth of only 0.2 per cent next year.

Almunia said: "The situation in the markets remains precarious and the crisis is not yet over. This means weaker growth."

Global financial markets have seen some of the most volatile trading in decades over the last month although a relative degree of calm has returned over the last week.

"I am convinced that we need common [European] action to help the recovery that is included in our forecast for the second part of 2009," Almunia said.

The commission is in the midst of drafting plans for a co-ordinated European economic stimulus package, which it aims to  present at the end of the month.

Outside the eurozone, the commission predicted that the United Kingdom economy would shrink by one per cent in 2009.

Inflation falling

In the face of sharply slowing growth, the commission forecast that unemployment would return as a major problem in Europe after a steady decline in recent years.

The commission predicted that the unemployment rate in the eurozone would creep up from a record low of 7.2 per cent in March to 8.7 per cent in  2010.

It said some relief would come in the form of lower inflation which the commission said had peaked since commodity prices had fallen in the middle of this year.

It forecast that annual inflation in the eurozone would reach 3.5 per cent in 2008 before easing back to 2.2 per cent in 2009 and 2.1 per cent in 2010.