BRUSSELS (MNI) – Peripheral Eurozone countries will be among the
hardest hit by the broad-based slump economic slump expected this year,
and the sovereign debt crisis remains the main downside risk for the
euro area as a whole, the European Commission said Thursday.

While a slowdown is forecast in all countries, “growth differences
are expected to remain pronounced,” the Commission said in its interim
outlook.

“The sovereign-debt crisis affects in particular those member
states with vulnerable public finances — often compounded by a weak
banking sector and low growth — while deleveraging needs stemming from
the preceding boom and bust continue to weigh on domestic demand,” it
explained.

The largest downward revisions to forecasts compared to last fall
came in Spain, Greece, Italy, Estonia and the Netherlands. By contrast,
forecasts were little changed for Germany, France, Austria and Slovakia.

Economic activity is now expected to contract by 1.0% in Spain, by
1.3% in Italy, by 3.3% in Portugal and by 4.4% in Greece, compared to an
average decline of 0.3% for the Eurozone as a whole.

Greece, Portugal and Spain already account for 95% of the rise in
unemployment in the EU since late 2010. Spain and Greece have seen their
youth unemployment rates surge from already high pre-crisis levels to
close to 50%, the report noted.

“By contrast, the labor market situation still appears to be more
benign in countries with less adjustment needs,” it said. “As a
consequence, the large dispersion of unemployment rates among member
states is expected to prevail in 2012.”

“Moreover, the financial market situation remains fragile,” the
Commission reminded. “If the sovereign-debt crisis were to rebound
massively, with a broad surge in risk premia and spillovers across
countries, severe credit rationing and a collapse of domestic demand
could ensue. Such an outcome would most likely trigger a deep and
prolonged recession, not sparing even those countries which have shown
more resilience so far.”

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