EU warns of possible recession in eurozone

Updated: 2011-11-10 20:47


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BRUSSELS - The European Union warned Thursday that the 17-country eurozone could slip into "a deep and prolonged recession" next year as the debt crisis shows alarming signs of spinning out of control.

The EU's economic watchdog, the European Commission, said its central forecast is that the eurozone will grow by only a paltry 0.5 percent in 2012. That's way down on the 1.8 percent prediction it made in the spring.

"This forecast is in fact the last wake-up call," the EU's Monetary Affairs Olli Rehn warned. "Growth has stalled in Europe, and there is a risk of a new recession."

The warning is the first acknowledgment of the possibility of a double-dip recession in Europe, a development that could hit the global economy hard. The Commission even warned that "a deep and prolonged recession complemented by continued market turmoil cannot be excluded," given the uncertainty over whether countries will implement spending cuts and reforms.

The sharp cut in the forecast comes as the eurozone's debt crisis has spread alarmingly to Italy, the single currency bloc's third-largest economy. The interest rate on Italy's 10-year bonds has reached the same 7 percent level that eventually forced Greece, Portugal and Ireland to request multibillion euro bailouts.

Speculation Premier Silvio Berlusconi will be replaced by leading economist and former Commissioner Mario Monti once he officially resigns has helped calm the market mood somewhat Thursday, but interest rates remain much higher than just a week ago.

Greece, meanwhile, was stuck in political chaos as party leaders have failed for several days to appoint an interim government, putting the country in serious danger of defaulting on its massive debts before the end of the year.

Elsewhere in its half-yearly predictions, the Commission said unemployment in the eurozone would be stuck at 9.5 percent for the foreseeable future. That's even higher than the 9 percent rate in the U.S.

"While jobs are increasing in some member states, no real improvement is forecast in the unemployment situation in the EU as a whole," Rehn warned.