Europe will suffer a deeper and longer recession than previously thought, the executive body of the European Union has warned, forecasting that mass unemployment would return across the continent.

Mired in the worst recession since World War II, the European commission said that the economies of both the EU and the 16-nation eurozone were forecast to contract four per cent this year – more than double its previous forecast.

|Photo: Germany’s economy, which relies heavily on exports, is expected to shrink by 5.4 per cent in 2009|

Joaquin Almunia, the EU economic and monetary affairs commissioner, said on Monday: “The European economy is in the midst of its deepest and most widespread recession in the post-war era.”

Although stimulus plans were expected to begin boosting economic activity, the commission said about 8.5 million Europeans were expected to lose their jobs in 2009 and 2010.

The reduction would drive the jobless rate in 2011 to 11.5 per cent in the eurozone and 10.9 per cent in the EU.

Dramatic downgrade

The prediction comes after the commission previously forecast in January that the eurozone economy would shrink only 1.9 per cent and the EU economy 1.8 per cent, with a slight upturn in 2010.

The commission said Germany, Europe’s biggest economy, which relies heavily on exports, was expected to contract by 5.4 per cent this year as foreign demand for its products dries up.

Many smaller countries were likely to see even worse recessions, with Latvia due to suffer a dramatic 13 per cent economic contraction this year while the once-booming Irish economy is expected to shrink by nine per cent.

Despite the deterioration in the European outlook, Almunia cautiously highlighted recent improvements in some economic figures, suggesting the slump may be stabilising.

Speaking in Brussels, the commissoner said: “We are no longer in a freefall but … we do not have the critical mass of data to say that we are out of the woods.”

Deficits breached

Government efforts to prop up slumping economies were predicted to weigh heavily on public deficits, which are projected to rise on average to 7.5 per cent of gross domestic product in the EU next year.

Almunia said: “The ambitious measures taken … are expected to put a floor under the fall in economic activity in the middle of this year and allow the start of recovery at the beginning of next year.”

He said that “it’s a bit early to say whether additional [stimulus] action is needed or not” but that EU leaders would broach the question at a summit next month.

This year, 21 out of the 27 EU countries are expected to have deficits in breach of the three per cent limit they are mandated to respect.

EU countries have economic stimulus measures under way worth 1.8 per cent of gross domestic product in 2009 and 2010, although the figure is much higher when accounting for automatic increases in unemployment benefits.

 

Source: Agencies