“Growth has stalled in Europe and there is a risk of a new recession,” said the Commission's economic chief, Olli Rehn, unveiling the report.
“Growth has stalled in Europe and there is a risk of a new recession,” said the Commission's economic chief, Olli Rehn, unveiling the report. Kaiser Nelson

EU Cuts growth for forecasts

A PREDICTION of collapsing economic growth across Europe from the European Commission yesterday threatened to ratchet up the eurozone sovereign debt crisis to a new level of intensity.

Warning that a "deep and prolonged recession" across the continent could not be ruled out, the European Union's executive body slashed its 2012 forecasts for growth across the single currency area from 1.8 per cent to 0.5 per cent. Economists pointed out that a drop in growth, particularly in the troubled nations of the eurozone periphery, would make it still more difficult for policymakers to hold the single currency together.

"Growth has stalled in Europe and there is a risk of a new recession," said the Commission's economic chief, Olli Rehn, unveiling the report.

He also warned that unemployment across Europe, which has already provoked mass protests in Athens and Madrid, will remain high throughout next year.

The news brings to a troubling end one of the most tumultuous weeks in the EU's economic history. As Greece and Italy struggled to provide the political clarity economists say is essential for their recovery - a technocrat was installed as Prime Minister in Athens yesterday but Italian parliamentarians continued to bridle against such a move in Rome - the spiralling cost of borrowing has threatened to infect other European economies. Yesterday France was moving to the top of the list of nations at risk.

The intense stresses in the A1.9 trillion Italian bond market at least abated slightly yesterday after Wednesday's panic. Italy managed to sell AUD$5 billion of one-year bonds and the interest rate on 10-year borrowing dropped below 7 per cent. But the main buyers of the one-year issue were believed to be domestic Italian banks, acting under pressure from the government in Rome. The fall in the crucial 10-year yield was reckoned by some market participants to be due to bond buying in the secondary markets by the European Central Bank rather than a substantial improvement in private investor sentiment.

The difference between the interest rate charged by the markets on borrowing by the French government and that charged on German borrowing also stretched to its highest level since the foundation of the single currency - a sign that the crucial economic axis of the eurozone itself is coming under strain.

Bond investors were also briefly panicked when the US credit rating agency Standard & Pooris accidentally sent out a message indicating, misleadingly, that it had downgraded France's credit rating.

Rome seemed to be moving towards a technocratic caretaker government headed by the former European Commissioner Mario Monti.

Yesterday Mr Monti pulled out of a conference he had been due to chair in The Hague this weekend, after the Italian President, Giorgio Napolitano, asked him to stay in Italy.

Meanwhile, in Greece, Lucas Papademos, a former vice-president of the European Central Bank, was named as the leader of a government of national unity in Athens, after five days of haggling. The coalition will be sworn in at noon tomorrow.

Emerging from talks with the outgoing Prime Minister, George Papandreou, and the leader of the opposition, Mr Papademos issued a call for unity.

He said: "The choices we make will be decisive for the Greek people. The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence."

Mr Papademosis first job will be to secure approval for the A130bn bailout package for Greece, agreed in Brussels last month, from the Greek parliament.

The European Commission's twice-yearly economic report forecasts that growth in Italy next year will slump to just 0.1 per cent. It predicts that the Greek economy will contract by 2.8 per cent and the Portuguese economy by 3 per cent.

Germany, Spain and France are predicted to register growth of just 0.8 per cent, 0.7 per cent and 0.6 per cent respectively. Portuguese employment is projected to rise to 14 per cent. And the jobless rate in Greece is expected to hit 18.4 per cent, well above the Commission's previous forecast of 15.3 per cent.

A report released by the Bundesbank, Germany's central bank, revealed yesterday that German banks have a total exposure to Greece of AUD$27.8 billion and of around AUD$118 billion to Italy. The report urged policymakers to tackle the 'root cause' of the crisis, which it identified as 'unsustainable public finances' in a number of eurozone states.