Still No Way Out

Report: Europe's economy on verge of recession

http://www.cbsnews.com/

10 November 2011

(MoneyWatch) Europe is dangerously close to falling into another recession as economic growth has all but come to a standstill, the European Union said Thursday.

The recovery in 27-member European Union -- the world's largest economy -- has stopped and is expected to stagnate until well into 2012, according to official forecasts from the EU's European Commission.

"Growth has stalled in Europe, and there is a risk of a new recession," Olli Rehn, the Commission's vice president for economic and monetary affairs, said in a statement. "The key for the resumption of growth and job creation is restoring confidence in fiscal sustainability and in the financial system and speeding up reforms to enhance Europe's growth potential."

The Commission's latest forecast underscores the severity of the sovereign debt crisis in the 17-member euro zone, which is threatening the solvency of Italy and Greece. Markets fear that a default by either nation would cause massive losses for European banks. Such loses could trigger a global credit crisis similar to the one in 2008 after Lehman Brothers went bankrupt.

The Commission expects gross domestic product in the EU to expand at just 0.5 percent for all of 2012, with a return to slow growth of about 1.5 percent forecast for 2013. Unemployment in the EU is projected to remain at 9.5 percent.

"Since the summer, the outlook has taken a turn for the worse," the Commission said in a statement. "The sovereign-debt crisis in euro-area member states has spread, debt sustainability in advanced economies outside the EU has also moved into investors' focus, and the global economy has lost steam."

With GDP growing barely above stall speed, "the risk of recession is not negligible," the Commission added, with the main threats coming from sovereign debt worries, the financial industry and world trade. Weakness in the EU and the sovereign debt problems in the euro zone could also accelerate to form a vicious downward spiral, the Commission warned.

"Slower growth affects the sovereign debtors, whose weakness weighs on the health of the financial industry," the Commission said.