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Europe

Recession tightens its grip on Europe, IMF says

Europe is facing a sharp slump in growth this year, the International Monetary Fund has said. It also forecast that the German economy was likely to contract by 5.6 percent, pushing unemployment rates up.

German eagle symbol

Many Germans will have to tighten their belts as the economy shrinks

With global trade shrinking and the world economy gripped by recession, the International Monetary Fund has slashed its 2009 growth forecast for the 16-member euro zone by another 1 percent to 4.2 percent.

The prognosis for Germany looked especially bad, with projections that the economy would shrink by 5.6 percent - a forecast officials said was "not implausible."

"I think we were all agreed around the table that we have a very difficult year ahead of us," said German Economics Minister Karl-Theodor zu Guttenberg at a news conference following an economic summit with Chancellor Angela Merkel and leaders from industry and unions.

German Finance Minister Peer Steinbrueck (SPD, l) and Economics Minister Karl-Theodor zu Guttenberg (CSU)

German Finance Minister Peer Steinbrueck (SPD, l) and Economics Minister Karl-Theodor zu Guttenberg (CSU) have their work cut out for them

The IMF's latest World Economic Outlook, published on Wednesday, underscores the risks that the economic crisis is rapidly turning into a labor market crisis, with euro-zone unemployment set to rise this year to 10.1 percent before edging up to 11.5 percent in 2010.

This is despite the massive stimulus packages introduced by European governments and the number of companies across Europe placing employees on short-term working contracts rather than laying them off. The euro-zone jobless rate stood at 7.6 percent in 2008.

"The euro area is coming out of this crisis somewhat later than the US because to some extent the policy stimulus kicked in later," IMF economist Jorg Decressin told reporters in Washington.

Wiggle room for Germany?

But the IMF said Germany's government still had more room for maneuver because of sound fiscal policies in the past, and should be spending extra public funds to make up for the massive decline in exports.

"Could they do more? The answer is yes," Decressin said. "This is a case where a country has done its homework during the good times... and can take advantage of this during the bad times."

As the world's leading export nation, Germany now appears to be bearing the brunt of the global recession, with the IMF saying unemployment could climb to 10.8 percent in 2010 from 9 percent this year. Germany's jobless rate was 7.3 percent last year.

But it is a picture repeated across Europe, with the IMF saying France faces a 3 percent fall in growth in 2009 and a meagre 0.4 percent pickup next year, while Italian GDP should sink by 4.4 percent this year.

Britain, which has been battling with falling consumer demand, a housing market collapse and a drawing in of its key financial sector, is expected to stage only a modest recovery after this year's 4.1 percent contraction. The IMF predicts British unemployment will jump from 7.4 percent in 2009 to 9.2 percent next year.

Ireland has been particularly badly hit by the world recession and the credit crunch, and the IMF predicts that Irish economic growth will fall by a disastrous 8 percent this year and by 3 percent in 2010 after a collapse in the nation's construction boom.

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