The European Union warned Thursday that the economic troubles plaguing it are likely to continue, slashing its euro-zone growth forecast and warning that a recession could soon be coming.
The news came on a day when Italy’s political and economic crisis continued to consume the continent and Greek politicians remained mired in talks over the next prime mininster.
Asian markets closed sharply lower on worries that Italy’s borrowing costs were spiking out of control, though European markets were mixed in morning trading.
The European Commission predicted 2012 growth of just 0.5% in the 17 countries that use the euro, down from spring forecasts of 1.8%. Unemployment is predicted to remain at 9.5%.
The gloomy figures underscore worries that Europe, barely out of the previous recession, could soon sink further into economic malaise. Italy’s debt yields have skyrocketed in recent days, past the levels at which Greece, Portugal and Ireland were forced to seek bailouts, and a one-year treasury bill auction on Thursday saw the highest yields in 14 years.
Italy raised the equivalent of $6.8 billion U.S. in the debt auction, at rates of 6.1%, up from 3.6% a month ago. Some of Italy’s underlying economic indicators remain solid. The concern is that if investors decide that the country is not able to make economic reforms that jolt it out of stagnant growth, they will drive up its borrowing costs to unsustainable levels.
Prime Minister Silvio Berlusconi has said he will step down after the parliament passes economic reforms, but it remains unclear when precisely he would leave. On Thursday, Italian news reports suggested that his departure could come within days, and indicated that economist and former European Commissioner Mario Monti was a leading candidate to form a national unity government to usher austerity measures through the country.
Top euro-zone officials have moved aggressively to whip errant members into shape -- sending international monitors to watch Italy’s economic measures and threatening to expel Greece from the euro zone.
But their exhortations have provoked pushback from Italy and Greece, and analysts warn that heavy-handed pressure may do little to solve Europe’s short-term problems.
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