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Fresh EU forecasts to shed new light on depth of recession

Brussels — The EU economy faces a new round of bad news on Monday when the European Commission issues new forecasts against the backdrop of a worsening recession and spiraling public deficits.

The European Union’s executive arm will shed new light on Europe’s clouded economic outlook with fresh forecasts of just how deep the economy has slumped into recession.

In the wake of the new estimates, European finance ministers will also meet on Monday and Tuesday for talks focused on whether EU governments are doing enough to keep the recession from getting deeper.

Economic data have only gone from bad to worse since the European Commission forecast in November that the eurozone economy would eke out growth of 0.2 percent this year.

Therefore, there are few doubts that the commission will sharply reduce its estimate with most private sector economists already expecting a deep contraction this year.

"The last forecasts were much too optimistic," said Jean-Claude Juncker, chairman of the Eurogroup of eurozone finance ministers.

Although the economic crisis erupted first in the United States, fears are growing that Europe may suffer longer as it struggles to get out of recession.

"The eurozone is going to suffer pretty much as heavily as everywhere else and might take even longer to get out of this if the policy response is not as aggressive as elsewhere," said Jonathan Loynes at consultants Capital Economics.

More pessimistic than most economists, he is forecasting the eurozone economy will contract by as much as 2.0 percent this year.

While the European Central Bank has slashed interest rates through a series of cuts to 2.0 percent, it has been far less aggressive than the US Federal Reserve, which has brought rates virtually to zero.

Likewise, European governments have been much less timid about spending their way out of recession than Washington, with the incoming administration working on a package likely to dwarf the 200 billion euros planned in Europe.

Although the efforts of EU governments have been widely welcomed, concerns are growing that the cost of such measures is driving many countries’ public finances dangerously deep into deficit.

Ratings agency Standard and Poor’s highlighted last week that ploughing public money into the economy is not without consequences, cutting its rating on Greece’s debt.

S and P also warned of a possible downgrade for Ireland, Portugal and Spain, which have particularly high public deficits.

In the wake of the announcement, the spread between interest rates on debt issued by those countries compared to low-risk German government bonds widened to the highest levels since the eurozone was formed in 1999.

Under normal economic times, EU countries are supposed to keep their deficits to less than three percent of output.

But with all the recent spending on economic stimulus and bank bailouts, many countries have overshot the limit by a wide margin with even Germany due to breach it next year.

The development is likely to be cause for concern for eurozone finance ministers when they meet over dinner in Brussels on Monday.

The ministers are then due to be joined by counterparts from the full 27 nation European Union on Tuesday for talks to focus on how well economic stimulus plans are working.