The EU economy will contract 4 percent this year as a worse-than-expected recession drives unemployment to levels not seen since World War II, the European Commission said on Monday.
The estimate marked a dramatic downgrade of the European economic outlook after the EU’s executive Commission forecast just three months ago that the eurozone economy would shrink only 1.9 percent and the EU economy 1.8 percent.
“The European economy is in the midst of its deepest and most widespread recession in the post-war era,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.
The chairman of the Eurogroup of eurozone finance ministers, Jean-Claude Juncker, said the economic and financial crisis risked morphing into a social crisis if politicians failed to respond to surging unemployment.
“We are in the heart of an economic and financial crisis and we are heading towards a social crisis,” Juncker said after chairing a monthly meeting of eurozone finance ministers in Brussels.
Despite some “positive signals” from recent economic data, the commission estimated that the recession would drag into next year, when both the eurozone and EU economies would shrink another 0.1 percent, and warned that the figures could be even worse.
In its last forecasts from January, the commission had predicted that the 16 countries using the euro would eke out growth of 0.4 percent next year and the 27-country EU 0.5 percent.
Despite the dramatic deterioration in the European outlook, Almunia cautiously highlighted recent improvements in some economic data, suggesting the slump may be stabilizing.
“We are no longer in a free fall, 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 percent 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 percent contraction in its economy this year while the once-booming Irish economy is seen shrinking 9 percent.
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 this year and next, driving the jobless rate next year to 11.5 percent in the eurozone and 10.9 percent in the EU.
“We really must not underestimate the multitude of problems that can come hand in hand with a rise in the unemployment rate,” said Juncker, who is also Luxembourg’s prime minister and finance minister.
“Millions of Europeans are put into despair when this sort of crisis sweeps through. That’s why we can’t underestimate the explosive effect ... of such an economic crisis and the rise in the unemployment rate.”
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