The European Union has cut its forecast for the eurozone’s growth in 2012 dramatically, from 1.8% to a nearly stagnant 0.5%.
European Commissioner Olli Rehn has said that there is a new risk of recession because of the dramatic stall in economic growth.
Precarious Italian position
The low growth will make it much harder for Europe to make its way out of its debt crisis, especially with the news that Italy’s position seems to be unsustainable.
The Mediterranean country raised 5 billion euros on Thursday after a successful bond auction, but was forced into an interest rate of 6.087% for one year of borrowing.
The rate is up from 3.57% in October, and is now at its highest rate in 14 years. The fears are multipled since Italian bonds reached 7% yields on Wednesday, the highest rate seen since the inception of the euro.
The 7% rate is seen as unsustainable for Italy, the world’s seventh largest economy, and Thursday’s lower rate of 6.087% relieved much stress by comparison. There were reports that the European Central Bank (ECB) has been buying Italian bonds in order to bring their yields down.
Analysts are sceptical concerning whether or not the ECB can protect the yields from reaching about 7% again in the long term.
Despite relatively good news from the Italian bond auction, the financial markets remained unsettled as the worries remained about Italy’s high cost of lending. Still, the Dow Jones in New York regained 1% on Thursday to offset huge losses on Wednesday.
The FTSE 100 in London and Paris’ Cac40 both ended the day lower.
Rise in debt
The European Commission, when announcing its revised growth forecasts, predicted that if Italy were allowed to go on without changes in policy, the country’s public debt would remain unchanged at a whopping 120.5% of GDP for 2012, eventually falling to 118.7% in 2013.
The commission also predicted that Greece would see its debt level rise to 198.3% of GDP.
UK Prime Minister David Cameron has said, concerning the figures, that eurozone leaders “must act now,” as the danger grows the longer they wait.
On the back of the growth forecast cuts in Europe, the International Energy Agency also cut its predictions for oil demand. A spokesperson from the agency said that oil markets are “inextricably linked” to the European debt situation.