EU expects eurozone to suffer mild recession

The 17-nation eurozone economy will suffer a modest recession this year despite recent signs of stabilization, particularly in financial markets, the European Union’s executive branch said Thursday.

In its latest projections, the European Commission forecast a 0.3 percent contraction in the eurozone economy, with Greece leading the way downwards with a massive 4.4 percent decline.

That would the fifth straight year of recession in Greece, which earlier this week clinched its second massive bailout package in less than two years.

In its last forecast in November, the Commission predicted a 0.5 percent expansion across the eurozone economy following last year’s 1.4 percent growth. The difference this time is that the Commission now expects the economies of Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia to contract in 2012, not just Greece and Portugal.

“Although growth has stalled, we are seeing signs of stabilization in the European economy,» said Olli Rehn, European Commissioner for Economic and Monetary Affairs. «Economic sentiment is still at low levels, but stress in financial markets is easing.”

Last November, financial markets were struck by fears that Europe’s debt crisis would not be confined to the relatively small economies of Greece, Ireland and Portugal. Worries grew that Spain and Italy could get swamped by their debt loads, too. Both countries now have new governments at the helm to enact sweeping austerity measures.

Those measures are expected to take their toll on their economies this year.

Spain is expected to contract 1 percent in 2012, against the 0.7 percent growth predicted in the fall. The Commission warned that if the Spanish government enacts further budget cuts in an effort to meet its 2012 targets, its economy will likely shrink even more.

Italy is predicted to contract by 1.3 percent this year, in contrast to the 0.3 percent growth predicted in November.

Unlike Spain, the Commission does not expect further budget cuts to make the recession even worse. However, it warns that significantly higher funding costs could hurt growth.

Rehn said many of the measures being taken across Europe are «essential» for financial stability and to establish conditions for more sustainable growth and job creation.

“With decisive action, we can turn the corner and move from stabilisation to boosting growth and jobs,» Rehn said.

The wider 27-nation EU, which includes non-euro countries like Britain and Sweden, is expected to post flat growth this year. [AP]