Year of stagnation awaits euro zone in 2012

Wed Dec 14, 2011 1:35pm EST
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By Andy Bruce

LONDON (Reuters) - A year of complete stagnation awaits the euro zone economy in 2012, according to a Reuters poll of economists, who said a recession has already started that will last until the second quarter of next year.

In the first poll of economists taken since EU leaders took an historic step towards fiscal union at a summit last week, economists lopped half a percentage point from their forecast for annual growth in 2012, leaving it at zero.

The survey made clear the pact would not ease the debt crisis now in its third year, and there is real worry among economists that nothing is being done by leaders to stimulate the growth needed to restore euro zone public finances.

While the European Central Bank will do its part by cutting interest rates to 0.75 percent next year, below the 1.0 record low first set in 2009 and to which it returned this month, it seems little can be done now to avoid a recession.

The poll showed the euro zone economy would contract 0.3 percent in the current quarter and another 0.2 percent in January-March, before a meager recovery in subsequent quarters.

With financial market reaction to last week's summit signaling no abeyance in the debt crisis, the potential for a far worse outcome still exists.

"It is vital that euro zone policymakers get a real grip on matters quickly," said Christian Schulz, senior economist at Berenberg Bank.

"If Greece suffers a messy debt default (or) Italy and Spain face extended punitive high market interest rates, this could potentially lead to extended, serious recession in the euro zone."   Continued...