Eurozone will enter recession, EU says

The European Union made it official on Thursday and predicted that the euro-using countries will enter a mild recession this year.

This is a downward revision from an autumn forecast in which the European Commission forecast stagnation for 2012.

While not entirely unexpected, the announcement reflects the depth of the sovereign debt crisis that has preoccupied Europe for the last two years. A prolonged recession in the EU — the largest trading partner the United States has — could massively undermine the recovery here.

The commission now predicts gross domestic product will contract by 0.3 percent in the euro area and for there to be zero growth for the EU as a whole this year.

The large economies of Italy and Spain are now seen to be entering recession this year for the first time, with Italy’s economy shrinking by 1.3 percent and Spain contracting by 1 percent.

Greece, which is facing the worst credit crisis and thus will have to implement deep budget austerity measures, will contract by 4.4 percent this year, the commission says.

These recessions are coupled with anemic growth in the other major economies. Europe’s largest economy, Germany, will only grow 0.6 percent this year. The figure is the same for the United Kingdom.

EU members states will meet at the beginning of March to hash out plans to stabilize the euro by creating a special bailout fund. If successful, business and equity market confidence could return the EU to prosperity.

The Obama administration is watching developments closely, knowing that developments in Europe could hurt Obama’s reelection campaign. The United States supports setting up an International Monetary Fund backup bailout system if the EU puts a strong fund in place. The Obama administration is not planning to ask Congress for more money for the IMF, however.