Euro zone headed for recession, report says

Countries such as Portugal, Ireland and Spain also are struggling to get their economies back on track, and leaders and economists are questioning whether Europe’s response to the crisis has focused too much on austerity and too little on growth.

Across the full 27-country European Union, the largest single market in the world, growth will be flat this year, the estimate said. The slowdown could reverberate far beyond the continent’s borders, as fewer companies make large purchases and investments and banks stay cautious about lending.

For the 17 countries that share a common currency, the economy will contract by 0.3 percent, the commission forecast.

“Prospects have worsened, and risks to the growth outlook remain,” E.U. Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels on Thursday. “But we are seeing signs of stabilization.”

The heads of 12 countries in the European Union this week sent a letter to top E.U. officials urging that Europe do more to promote economic expansion.

Economists say the European troubles will put a drag on the U.S. economy, though the magnitude of the impact depends on how poorly the European economy fares.

“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.

In the past, European countries have sustained recessions without triggering one in the United States. In 1993 and 2003, Germany suffered mild economic contractions while the American economy continued to grow.

Other times,  however, as in 1975 and 1982, the United States and Germany had to deal with recessions at the same time.

Faucher said that even if Europe’s financial crisis does not set off a U.S. recession, it will hurt the economy, partly because the European demand for American products will decline. If, however, the troubles abroad trigger a domino effect, spreading the financial crisis far beyond the region, the United States face a recession, Faucher said.

“The nightmare scenario is that there is a financial crisis in Europe, and it spreads, with lending freezing up,” Faucher said. “That could put us into a recession. I don’t expect that to happen, but it could.”

In some ways, Europe’s economic situation appears less dire than it did a few months ago. Last fall, borrowing costs of some of the region’s largest countries kept rising, putting those nations at risk of bankruptcy even though their underlying economies were robust enough to maintain spending under ordinary circumstances. Italy and Spain changed leaders, and the European Central Bank loosened lending terms, helping to ease the immediate pressure.

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