European Union warns about ‘deep recession’

Europe warned yesterday that its debt crisis was dragging the region towards a new recession, deepening the sense of foreboding as Italy and Greece struggled to put together new governments.

Europe warned yesterday that its debt crisis was dragging the region towards a new recession, deepening the sense of foreboding as Italy and Greece struggled to put together new governments.

After doubts grew over Italy’s ability to keep servicing its debts, the European Union’s new economy tsar said the bloc faced tipping back into recession in 2012 due to a “vicious circle” of government debt, vulnerable banks and collapsed spending.

“Growth has stalled in Europe, and there is a risk of a new recession,” economic affairs commissioner Olli Rehn said as the EU released detailed forecasts for the eurozone and broader econonomy for the next two years, with GDP “now projected to stagnate until well into 2012.”

Growth across the eurozone in 2012 would collapse to 0.5 percent, said the forecast, a steep drop from its previous prediction of 1.8 percent. The forecast for this year was also revised downwards from 1.6 to 1.5 percent.

The economy in Italy, the eurozone’s third largest economy, would virtually stagnate in 2012 with growth of just 0.1 percent, according to the forecast.

With doubts growing over Italy’s ability to service its debts, Rehn ordered France -- the No. 2 eurozone economy, already threatened with a humiliating US-style credit downgrade -- to bring forward yet more budget cuts.

Italy’s growing crisis has already prompted Prime Minister Silvio Berlusconi to announce his resignation. He will stand down after parliamentary approval this weekend of a package of economic reforms aimed at calming investor fears, which have pushed Italy’s borrowing rates to alarming levels of seven percent.

Rehn, who has already despatched officials to Rome to pore over the Italian government’s books alongside the International Monetary Fund and European Ceantral Bank staff, warned that the spiralling lending rates “would have a significant impact on financing conditions and thus also growth of the real economy.”

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