European Commission cuts growth forecast

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

The European Commission, the executive arm of the EU, on Wednesday revised its forecast for the economy of the entire region, saying that it now expected gross domestic product to contract by 0.3 per cent on an annual basis this year, rather than remaining flat as it predicted in the spring. It also said that the 17 countries that use the euro will contract, with GDP falling 0.4 per cent, against a previous expectation of a 0.3 per cent fall.

But the most significant downgrades are for next year's forecasts. The commission had expected the eurozone to find its footing in 2013, with 1 per cent growth. Now it predicts only a 0.1 per cent uptick. For all 27 countries in the EU, it forecasts 0.4 percent growth, compared with 1.3 per cent last spring.

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

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

"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 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 per cent, and it is 10.6 per cent 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 per cent in September.

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.

Greece has suffered the most from this vicious 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 per cent 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.

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 pe rcent 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."