Recession Looms in Euro Zone

The euro zone is headed for a mild recession this year, the region’s second economic contraction since 2008, the European Commission said Thursday. The announcement amends a November prediction for slight growth in 2012, and comes days after European officials agreed to release a second, 130 billion-euro bailout for Greece.

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Across the full 27-country European Union, the largest single market in the world, the commission expects growth to be flat this year. But for the 17 countries using the euro, the economy is expected to contract by 0.3 percent. Countries like Portugal, Ireland, and Spain have struggled to get their economies back on track, leading many to question whether Europe’s response to the crisis has focused too much on austerity and too little on growth.

The leaders of 12 countries in the European Union sent a letter this week to top EU officials urging them to do more to promote economic expansion. Without action, a slowdown could reverberate far beyond the continent’s borders, as fewer companies make large purchases and investments abroad, the region decreases imports, and banks become more cautious about lending. Economists say the European troubles will put a drag on the U.S. economy, though the magnitude of the impact will depend on how poorly European economies perform.

“If the problems in Greece are contained and the European recession is mild, as we believe it will be, the U.S. should be able to withstand without going into a recession,” said Gus Faucher, senior economist at PNC Financial Services. But even if Europe’s financial crisis does not set off a recession in the U.S., it will still hurt the U.S. economy, partly because European demand for American products will decline, said Faucher.

The commission’s report referred to heavy austerity measures being instituted in struggling countries, saying that, if the spending cuts continue, short-term growth would probably slow more than current estimates. However, the commission added that, if budget-tightening “appears to be needed,” it could boost market confidence.

The leaders of Britain, Spain, Italy, and nine other countries called on European officials in a letter this week to eliminate trade barriers as a way to stimulate the economy. “The crisis we are facing is also a crisis of growth,” the letter said, not just of rampant spending and heavy debt. However, Germany and France, the two biggest drivers of the austerity policies circulating in Europe, did not sign the letter.

“As many of our major competitor economies grow steadily out of the gloom of the recent global crisis,” the letter said, “financial market turbulence and the burden of debt renders the path to recovery in Europe much harder to climb.”

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