European Economy to Shrink 4% in Worst Post-War Slump

EU says recession will drag into 2010 when both the eurozone and EU economies would shrink another 0.1%

The EU economy will contract 4% this year as a worse-than-expected recession drives unemployment to levels not seen since World War II, the European Commission warned on May 4. The estimate marked a dramatic downgrade of the European economic outlook after the commission forecast only three months ago that the eurozone economy would shrink only 1.9% and the EU economy 1.8%.

Despite some "positive signals," the EU's executive arm estimated that the recession would drag into 2010 when both the eurozone and EU economies would shrink another 0.1% and warned that the figures could be even worse.

Despite the dramatic deterioration in the European outlook, EU Economic and Monetary Affairs Commissioner Joaquin Almunia cautiously highlighted recent improvements in some economic data, suggesting the slump may be stabilizing. "We are no longer in a freefall, but even if some positive signals are appearing we do not have the critical mass of data to say that we are out of the woods," he told a news conference in Brussels.

Europe's biggest economy, export-dependent Germany, was expected to contract by 5.4% this year as foreign demand for German products dries up.

Many smaller countries were likely to see even worse recessions, with Latvia due to suffer a stunning 13.1% contraction in its economy this year while the once-booming Irish economy is seen shrinking 9%.

Although recovery plans were expected to begin boosting limp economic activity, Europe was set to see a dramatic rise in unemployment "to hit a post-war record," the commission said. Mass unemployment could return to haunt Europe with some 8.5 million Europeans expected to lose their jobs in 2009 and 2010, driving the jobless rate in 2010 to 11.5% in the eurozone and 10.9% in the EU.

Government efforts to prop up slumping economies were also expected to weigh heavily on public deficits, which are projected to rise on average to 7.5% of gross domestic product in the EU next year. This year, 21 out of the 27 EU countries are expected to have deficits in breach of the three-percent limit they are bound to respect.

Still Almunia was confident that the billions of euros European governments are pumping into their economies would help revive them in the months ahead. "The ambitious measures taken in these exceptional times are expected to put a floor under the fall in economic activity in middle of this year and allow the start of recovery at the beginning of next year," he added.

EU countries have economic stimulus measures underway worth 1.8% of gross domestic product in 2009 and 2010 although the figure is much higher when accounting for automatic increases in unemployment benefits as well.

Copyright Agence France-Presse, 2009

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