Altering its forecast on the state of the European economy in 2012, the European Commission said that the euro area would shrink instead of expanding, largely because of Spain and Italy. The two countries are expected to be in for some difficult times as they cope with various economic woes.
Bloomberg reported that the EC changed its November forecast of 0.5% growth for the euro area to one of a contraction of 0.3%, due mainly to new predictions of a 1% contraction in Spain and 1.3% in Italy. European Union Economic and Monetary Commissioner Olli Rehn was quoted saying, “The euro area has entered into a mild recession. Prospects have worsened and risks to the growth outlook do remain, but there are signs of stabilization.”
This will be the first time since 2009 that a full-year contraction Europe-wide has occurred. At the time the European economy suffered a 4.3% drop in the wake of the U.S. banking crisis, which revealed shortcomings in banking throughout Europe that launched the sovereign debt crisis.
Inflation was also predicted to rise higher than originally expected, with the November estimate of 1.7% giving way to a new expectation of 2.1%–higher than the European Central Bank’s target of 2%.