The European Commission said the euro-zone economy will virtually grind to a halt next year as the debt crisis ravages southern Europe and gnaws at the economic performance of export-driven Germany.
The 17-nation euro economy will expand 0.1% in 2013, down from a May forecast of 1%, the commission said today. It cut the forecast for Germany, Europe’s largest economy, to 0.8% from 1.7%.
The economic falloff may make it harder for European governments to pull Greece back from the brink and deal with a possible aid program for Spain, leaving the debt crisis to fester for a fourth year.
Technically, the euro area will avert a recession, defined as two consecutive quarters of contraction, though the overall economy will still shrink 0.4% in 2012, ending a two-year expansion, the commission said.
The euro fell after the downbeat forecast and a warning by European Central Bank President Mario Draghi that debt-related "difficulties" are "starting to affect the German economy." The currency slid to $1.2754 U.S., a drop of 0.5% today.
Next year’s near-stagnation across Europe masks a north- south divide, in which the economy ekes out positive numbers along an arc from Finland through the Low Countries to France, and contraction grips Greece, Cyprus, Slovenia, Italy, Spain and Portugal.
North-south tensions over the debt crisis will bubble up on Nov. 12, when finance ministers judge whether Greece has made enough budget cuts and economic reforms to deserve the next installment of 240 billion euros ($308 billion U.S.) in aid offered since 2010.
Dilemmas facing Greece and its creditors were highlighted by a commission forecast that Greek debt will rise to 188.4 percent of gross domestic product in 2013, higher than the 168 percent predicted in May. Euro governments are aiming to wrestle it down to 120 percent by 2020.
Germany is becoming less resistant to the economic woes of southern Europe just as Chancellor Angela Merkel, the dominant figure in the handling of the debt crisis, embarks on a campaign for a third term in elections in late 2013.
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