Eurozone growth forecasts slashed amid 'risk of new recession'

Leaders gathered in Cannes for the G20 (AP)

A prediction of collapsing economic growth across Europe from the European Commission yesterday threatened to ratchet up the eurozone sovereign debt crisis to a new level of intensity.

Warning that a "deep and prolonged recession" across the continent could not be ruled out, the EU's executive body slashed its 2012 forecasts for growth across the single currency area from 1.8 per cent to 0.5 per cent. Economists pointed out that a drop in growth, particularly in the troubled nations of the eurozone periphery, would make it still more difficult for policymakers to hold the single currency together.

"Growth has stalled in Europe and there is a risk of a new recession," said the Commission's economic chief, Olli Rehn, right, unveiling the report. He also warned that unemployment across Europe, which has already provoked mass protests in Athens and Madrid, will remain high throughout next year.

The news brings to a troubling end one of the most tumultuous weeks in the EU's economic history. As Greece and Italy struggled to provide the political clarity economists say is essential for their recovery – a technocrat was installed as Prime Minister in Athens yesterday but Italian parliamentarians continued to bridle against such a move in Rome – the spiralling cost of borrowing has threatened to infect other European economies. Yesterday, France was moving to the top of the list of nations at risk.

The intense stresses in the €1.9 trillion Italian bond market at least abated slightly yesterday after Wednesday's panic. Italy managed to sell €5bn (£4.3bn) of one-year bonds and the interest rate on 10-year borrowing dropped below 7 per cent. But the main buyers of the one-year issue were believed to be domestic Italian banks, acting under pressure from the government in Rome. And the fall in the crucial 10-year yield was reckoned by some market participants to be due to bond buying in the secondary markets by the European Central Bank rather than a substantial improvement in private investor sentiment.

The difference between the interest rate charged by the markets on borrowing by the French government and that charged on German borrowing also stretched to its highest level since the foundation of the single currency – a sign that the crucial economic axis of the eurozone itself is coming under strain.