Bleak picture of eurozone's economy

The European Commission's winter economic forecasts paint a bleak picture of an economic slowdown even worse than predicted three months ago.

The eurozone's economy as a whole will contract by 0.3% according to the forecasts presented by Olli Rehn, the European commissioner for economic and monetary affairs and the euro, on Friday (22 February). In November, the last time the Commission produced such forecasts, he was predicting 0.1% growth.

The economic outlook for most European countries has been downgraded. France's gross domestic product (GDP) will grow by just 0.1% (even less than the 0.2% had been forecast in November) and Germany's by 0.5% (revised down from 0.8%).

The countries that have suffered most during the sovereign-debt and banking crisis – Greece, Spain, Portugal and Italy – continue to struggle in deep recession (Ireland is the one bright spot), but the worsening economic situation in the eurozone's core is the biggest cause for concern. 

Unemployment continues to rise: the Commission predicts that 2012's eurozone jobless rate of 11.4% will be surpassed this year and rise to 12.2%. Record high levels of unemployment in Greece and Spain show little sign of significant improvement.

Rehn attempted to put a positive spin on the forecasts, saying that Europe's economy was “gradually overcoming headwinds”.

“The decisive policy action undertaken recently is paving the way for a return to recovery,” he said. “We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation.”

He admitted, however, that this upturn in confidence was not borne out by the “hard data”.

“The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” he said.

The grim economic situation also means than several eurozone member states are likely to miss European Union deficit-cutting targets. France could be the biggest culprit. Its target is 3% of GDP this year but it looks on course to post a substantially worse figure of 3.7%. Rehn must decide whether to relax France's targets – as he did with Spain last year – if he thinks that it was missed because of factors outside the government's control.      

See next Thursday's European Voice for a full breakdown of the economic forecasts by member state.