Euro zone growth will slow but no recession

| September 15, 2011 | 0 Comments

The European Commission has today warned that euro zone growth will almost grind to a halt in the second half of the year.

Its prediction comes amid the ongoing debt crisis in the 17-member region.

It slashed growth forecasts for the third quarter to 0.2%, while growth for the final quarter has been revised down from 0.4% to 0.1%.

Growth will be hit by several euro zone nations having to reduce spending in order to slash debt levels.

However, the Commission is confident that there will not be a double-dip recession.

In a report, EU Economic Affairs Commissioner Olli Rehn, said growth will come “to a virtual standstill” in the second half of the year, adding: “The outlook for the European economy has deteriorated. Recoveries from financial crises are often slow and bumpy.”

In the meantime, the report also revealed that inflation would fall back faster than anticipated after commodity price rises had slowed.

The current inflation target, set by the European Central Bank (ECB), is close to 2% and the Commission is forecasting the figure for 2011 at 2.5% year-on-year.

In related news today, French and German leaders have said that Greece should stay in the euro zone after speculation that the country may have to leave the 17-nation bloc.

A conference call between Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel resulted in Greece being an “integral” part of the euro zone.

In a joint statement, Mrs Merkel and Mr Sarkozy said: “Putting into place commitments of the (bailout) programme is essential for the Greek economy to return to a path of lasting and balanced growth.”

Greece has been the recipient of two financial bailouts but investors are still concerned that the country will default on its debt.

However, Greece said it remains committed to meet all the deficit reductions plans it agreed to in exchange for its two bailouts.

In May last year, the European Union and the International Monetary Fund agreed to provide Greece €110 billion (£96 billion), which it is still receiving in tranches, the sixth being due on 30 September. However, this is subject to Greece meeting its spending reduction targets.

In July of this year, it was agreed that Greece would be given a second bailout fund of €109 billion.

In other news this week, credit rating agency Moody’s downgraded two French banks after reviewing their exposure to Greek debt, while a third, BNP Paribas, is being kept on review for a possible downgrade.

Credit Agricole was downgraded from Aa1 to Aa2, while Societe Generale was cut to Aa3 from Aa2.

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