Europe’s recession forecast to persist into 2010,

By Tony Barber in Brussels
Published: March 10 2009 02:00 | Last updated: March 10 2009 02:00
Europe's recession risks lasting into 2010, according to a European Union assessment that calls the prospects of a return to economic growth next year "highly uncertain".

The document, obtained by the Financial Times and due to be approved by finance ministers on Tuesday, paints a darker picture of the EU's outlook than previous forecasts published by the European Commission.

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In January, the Commission forecast a gradual economic recovery in the course of next year, and said it expected gross domestic product to fall 1.8 per cent in the 27-nation bloc this year but to expand by 0.5 per cent in 2010.

The latest policy paper, prepared for the EU finance ministers' meeting, also says that ministers agree that the International Monetary Fund "requires a substantial increase in its resources to assist countries particularly affected by the financial crisis".

European governments represented in the G20 group of advanced and emerging economies agreed in Berlin last month to support an increase in the IMF's resources for crisis management to $500bn (€397bn).

The latest policy paper does not include specific forecasts. But it states that unemployment will rise sharply this year and in 2010. The 16-nation eurozone will also have to tackle persistent gaps in business competitiveness among member states, the paper says.

The outlook for 2010 is "highly uncertain" and "feedback loops" between the real economy and financial markets "are aggravating the situation", it says.

"Financial markets remain volatile and credit channels are not yet functioning properly," the paper says. "Unemployment rates are expected to rise sharply in most member states in 2009 and 2010."

The gloomy assessment follows the European Central Bank's decision last week to revise downwards its 2010 growth forecast for eurozone countries from 1 per cent to zero.

In January the Commission estimated that the jobless rate would rise from 7 per cent of the workforce in 2008 to 8.7 per cent this year and would climb still further to 9.5 per cent in 2010.

EU governments fear that the combination of rising unemployment and Europe's worst recession since 1945 could promote social unrest and labour protests of the kind seen in recent weeks in Bulgaria, France, Greece, Ireland, Latvia and Lithuania.

Since the world financial crisis exploded in September, three European governments have fallen - in Belgium, Latvia and Iceland, which is not a EU member but could soon apply to join.

The EU policy paper says the euro area must address persistent divergence in competitiveness and in current accounts