EU recession 'worse than thought'

Europe's economy to shrink by four per cent in 2009 with sharp rise in unemployment.

    Germany's economy, which relies heavily on exports, is expected to shrink by 5.4 per cent in 2009 

    The reduction would drive the jobless rate in 2011 to 11.5 per cent in the eurozone and 10.9 per cent in the EU.

    Dramatic downgrade

    The prediction comes after the commission previously forecast in January that the eurozone economy would shrink only 1.9 per cent and the EU economy 1.8 per cent, with a slight upturn in 2010.

    The commission said Germany, Europe's biggest economy, which relies heavily on exports, was expected to contract by 5.4 per cent this year as foreign demand for its products dries up.

    Many smaller countries were likely to see even worse recessions, with Latvia due to suffer a dramatic 13 per cent economic contraction this year while the once-booming Irish economy is expected to shrink by nine per cent.

    Despite the deterioration in the European outlook, Almunia cautiously highlighted recent improvements in some economic figures, suggesting the slump may be stabilising.

    Speaking in Brussels, the commissoner said: "We are no longer in a freefall but ... we do not have the critical mass of data to say that we are out of the woods."

    Deficits breached

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

    Almunia said: "The ambitious measures taken ... are expected to put a floor under the fall in economic activity in the middle of this year and allow the start of recovery at the beginning of next year."

    He said that "it's a bit early to say whether additional [stimulus] action is needed or not" but that EU leaders would broach the question at a summit next month.

    This year, 21 out of the 27 EU countries are expected to have deficits in breach of the three per cent limit they are mandated to respect.

    EU countries have economic stimulus measures under way worth 1.8 per cent of gross domestic product in 2009 and 2010, although the figure is much higher when accounting for automatic increases in unemployment benefits.

    SOURCE: Agencies


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