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The EU is facing a "deep and protracted" recession, according to forecasts made in Brussels and released on Monday, Jan. 19. More economic contraction and rising unemployment are on the horizon, Brussels said.
Europe is likely to experience more downs than ups in the coming year
The 16 nations which use the euro will see their economies shrink by 1.9 percent, while the EU-wide contraction will be almost as bad at 1.8 percent, according to the European Commission, the EU's executive.
Those dire numbers are just one portion of a grim tableau the commission presented on Monday, describing the economic crisis as the worst faced by the world since World War Two, with overall outlook still exceptionally uncertain.
"Except for government consumption and public investment, all demand components are forecast to put a drag on GDP growth," the commission said in presenting the forecasts.
The current forecast is a dramatic downward revision from previous EU estimates. The commission's last estimate in November predicted the euro-zone economy would manage to eke out growth of 0.1 percent.
Lines at employment centers will likely get longer
The economic contraction could lead the EU back to the bad old days of high unemployment, Brussels said. The EU labor market is expected to be hard hit by the global crisis, with 3.5 million jobs disappearing in the EU in 2009.
Unemployment hit a record low of 7.2 percent in March last year, but began creeping up as the economic situation darkened. The jobless rate will likely rise to 9.3 percent this year and reach 10.2 percent in 2010, the first time unemployment has surpassed 10 percent since 1998.
Some EU countries could see jobless rates shoot even higher. Spain, which has been especially affected by the housing market crash, could see its unemployment rate expand from 11.3 percent in 2008 to 16.1 percent next year and reach a breathtaking 18.7 percent in 2010.
Germany, Europe's economic powerhouse, will not be spared the fallout. The EU predicts its export-heavy economy will contract by 2.3 percent this year. That is a slight improvement over estimates put forward by some economists over the past few weeks who had predicted the German economy could shrink by as much as four percent in 2009.
It's forecast Germany will see its worst economic contraction in 60 years
The commission said Germany's two economic stimulus packages would help the economy weather the worst of the storm. Still, the downturn could turn out to be Germany's worst in more than 60 years.
Brussels said the euro-zone would not begin to pull itself out of the slump until mid 2009 at the earliest and even then, growth is estimated to only be about 0.5 percent in 2010.
Last week, the European Central Bank cut rates by half a percentage point to two percent in response to the deeping recession. The stimulus packages launched by European governments in December totalled some 200 billion euros ($265 billion) and since then, some governments, such as Germany's, have announced new stimulus measures or are considering them.
National or global approach?
Also on Monday, UK Prime Minister Gordon Brown warned of depending on national plans to attack what is a global crisis.
The UK's Gordon Brown wants to see more coordinated action
"Unless we come together to address these problems in a coordinated way, the world is at risk of a damaging spiral of de-globalizing. It is fueled by a combination of deleveraging and national-only policy solutions," he said at a press conference to unveil a second major bank rescue package.
That stance gets a nod from many economists, who have criticized some countries, including Germany, for being too cautious with their stimulus or of not thinking beyond their own borders. Just months ago, Berlin resisted spending large sums on stimulus packages, even criticizing other countries such as the UK for their "crass Keysianism."
Even after a first stimulus package was put together in November, German Chancellor Angela Merkel was dubbed "Madame Non" in some European quarters. That stimulus package was attacked as being too small to give Europe's largest economy the shot in the arm it badly needed.
The attitude in Berlin toward spending changed as the economic outlook became more dire.
"(Berlin) has realized this is a global crisis," Michael Burda, an economist at Berlin's Humboldt University, told Deutsche Welle.
Berlin's new 50-billion-euro ($66 billion) rescue plan mixing infrastructure investments and tax cuts unveiled this month has won praise, including from Prime Minister Brown. Still some economists think a more coordinated EU effort would be more effective in the face of such a large economic meltdown.
"It doesn't make any sense to have one country doing on its own what it could achieve more efficiently in coordination with other European countries," Burda said. "But a lot of Germans don't trust Brussels, and a lot of other people don't either, so we just have to live with what we've got."