Economies in the eurozone 'will shrink by 1.9 per cent'

The eurozone economy will shrink by 1.9 per cent this year – its first contraction since the single currency was established a decade ago – and will grow by only 0.4 per cent in 2010, the European Commission predicted yesterday.

The outlook for 2009 represents a marked deterioration from the 0.5 per cent contraction the EC forecast only last month. Joaquin Almunia, the EU's economic and monetary affairs commissioner, said: "The overall outlook is grim. In 2009, we are forecasting negative growth for 11 out of the 16 euro area members."

However, Mr Almunia played down the risk of Spain, the eurozone's fourth-biggest economy, defaulting on its debt after the rating agency Standard & Poor's cut Madrid's sovereign credit rating from AAA to AA+, because it expects the country's public finances to deteriorate further.

Mr Almunia added: "I don't think ... the risk of default is important. Risk of default ... always exists in the private and public sectors but, in the case of euro area members, I don't think the risks are high or are significant."

S&P cut Greece's credit rating last week. The EC has forecast that 11 of the 16 eurozone countries will fall into recession in 2009, compared with just two in 2008. Of the 16, Ireland will suffer the most, tumbling by 5 per cent, while Germany will endure the second-biggest contraction, of 2.3 per cent.

The grim EC forecast follows the European Central Bank's decision last week to cut interest rates by 0.5 per cent to 2 per cent, their lowest since 1999. However, the eurozone base rate remains noticeably higher than the Bank of England's 1.5 per cent and the near-zero levels in the US and Japan.

EU governments have prepared massive financial stimulus packages to help shore up their flagging economies, Germany's proposed measures will cost up to €50bn (£45.3bn), while those in France will cost €26bn £23.5bn).