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Updated Wednesday, November 7, 2012 at 09:59 PM

EU: Eurozone recession to be worse, rebound slower

By SARAH DiLORENZO
AP Business Writer

Europe's economy is still reeling and unemployment could remain high for years despite the progress made in solving the debt crisis, the European Union warned Wednesday, as it downgraded next year's forecasts for the 27-country bloc.

The European Commission, the executive arm of the EU, on Wednesday revised down its forecast for the region's gross domestic product, which it now expects to grow by just 0.4 percent in 2013, compared to its expectations this spring of 1.3 percent growth.

The commission had previously expected the 17 countries that use the euro to find its footing next year, with 1 percent growth. Now it predicts only a 0.1 percent uptick.

The report also suggests that unemployment won't start falling until 2014 - and then only slightly.

"Europe is going through a difficult process of macroeconomic rebalancing and adjustment, which will last for some time still," Olli Rehn, the EU's economic and monetary affairs commissioner, told reporters. "Market stress has been reduced but there is certainly no room for complacency."

The downbeat forecast helped erase an initial euphoria in markets over President Barack Obama's re-election, with France's CAC-40 stock index and the DAX in Germany both down 1.5 percent in afternoon trading Wednesday.

The eurozone has made progress this year toward resolving its debt crisis, which has been dragging down economies throughout the EU and beyond. Countries that use the euro have slashed spending and promised to keep their deficits in check; they've vowed to better protect their banks by improving how they're regulated and supervised; and the European Central Bank has put in place a plan to help countries struggling with high borrowing costs, the hallmark of the crisis and the reason some have sought bailouts.

But those measures have not yet been felt in the real economy. The unemployment rate across the eurozone is at a record high of 11.6 percent, and it is 10.6 percent in the wider EU. In the latest in a steady stream of job cuts, Danish wind turbine maker Vestas, Swedish wireless equipment group LM Ericsson, and Dutch bank ING announced a total of almost 7,000 layoffs Wednesday. Eurostat, the EU's statistics agency, also said retail sales in the eurozone shrank 0.2 percent in September.

This commission's predictions for this year reflect that grim reality. It expects the EU's economy to contract by 0.3 percent, rather than remaining flat as it forecast in the spring. It also predicts that the eurozone GDP will fall 0.4 percent, against a previous expectation of a 0.3 percent drop.

Official third-quarter GDP figures - which will show whether the eurozone has entered recession as economists suspect it has - are due to be released on Nov. 15. A recession is defined as two quarters in a row with negative growth.

Many economists have argued that, in solving one crisis by cutting government spending and raising taxes, politicians have exacerbated another - slow or negative growth. Meanwhile, tighter banking rules have hurt lending, the fuel economies need to grow.

The commission's report also confirms that the crisis is not sparing even Germany, Europe's largest economy and the traditional motor for growth.

It predicted that Germany would eke out just 0.8 percent growth in 2012, compared with its earlier forecast of 1.7 percent. ECB President Mario Draghi warned Wednesday that "the latest data suggest that these developments are now starting to affect" the German economy.

In a speech given in Frankfurt, Draghi called on governments to back up the ECB's plans to help countries with their borrowing costs by cutting debt and improving growth through cutting excessive red tape.

"Across the whole euro area, governments are making determined efforts to reverse economic imbalances," he said. "They are implementing reforms to redress the misguided policies of the past and to create sustainable long-term growth. It is a difficult road and there is still a long way to go. But the early signs are encouraging."

"Financial developments in Germany are the mirror-image of financial developments in the rest of the euro area," Draghi added. "And this means that measures to ensure the stability of the euro area as a whole will also be to the benefit of Germany."

Greece has suffered the most from the vicious slow growth cycle and is now in its fifth year of recession. Many say it's unclear how the country will ever manage to reduce its debts, spark growth and break the cycle. The new forecast expects Greece's economy to contract 6 percent this year and another 4.2 percent next year. In the spring, the commission had hoped growth would be flat in 2013.

Because low or negative growth reduces the amount of money governments receive in taxes, stagnation also threatens to throw countries off their deficit targets. According to the report, both Greece and Spain won't meet their goal of reducing their deficits to 3 percent by 2014. It predicts Greece's will be 4.5 percent at that point and Spain's 6.4 percent.

In Greece's case, that could mean jeopardizing the rescue loans it is using to fund itself. Greece has asked its international creditors for more time to reach its goal. Rehn said Wednesday that the country's debt levels look increasingly unsustainable and that something must be done, but he stopped short of saying what.

---

David McHugh in Frankfurt contributed to this report.


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