Europe ‘heads for second recession’

According to the European Commission the eurozone has grown by just 0.5 per cent in the last quarter, suggesting that its under-siege economies are on the verge of shrinking.

The estimate added to a general feeling of gloom about Europe’s prospects made worse by the continuing political turmoil in Italy and Greece, with rumours that the stronger economies in the 17-country currency are about to ditch weaker southern European members.

The commission’s economic forecast delivered nothing to rally markets as the FTSE 100 in London fell again by 15.56 points and the French Cac was down by 10.32 points after a week of consistent falls. Only the German Dax rose, by 38.27 points.

Announcing the growth estimates, economic and monetary affairs commissioner Olli Rehn warned: “Growth has stalled in Europe and there is a risk of a new recession.”

Overall EU GDP, the combined national wealth of all the 27 member states including those outside the euro such as the UK, is now projected to “stagnate” until well into 2012, with the commission downgrading its growth forecast of 1.8 per cent next year to just one half of one per cent.

The only optimism was a projected return to “slow growth” of about 1.5 per cent by 2013.

The forecast again prompted Prime Minister David Cameron to demand that leaders within the eurozone act to get their house in order before the crisis becomes unmanageable.

In particular, he said that Italy – the world’s eighth biggest economy and the eurozone’s third largest – needs to be protected with a substantial firewall of up to €2 trillion.

And he repeated his call for eurozone leaders to act swiftly to save the single currency.

“Italy is the third largest country in the eurozone,” he said. “Its current state is a clear and present danger to the eurozone and the moment of truth is approaching.

“If the leaders of the eurozone want to save their currency then they – together with the institutions of the eurozone – must act now.”

He added: “The longer the delay, the greater the danger.

“Here in Britain, outside the euro, we must prepare for every eventuality – and that is exactly what we will do.”

Germany’s chancellor Angela Merkel added her voice to the concerns: “It is very important that Italy wins back its credibility.”

She added: “That means the austerity package being implemented very quickly, as is now the plan, and above all the political leadership being clarified as quickly as possible – because I think that is very important for Italy’s credibility.”

Christine Lagarde, the head of the International Monetary Fund, said uncertainty around who would succeed Italian prime minister Silvio Berlusconi was fuelling market turmoil.

She said: “That confusion is particularly conducive to volatility. Political clarity is conducive to more stability and my objective from the fund’s point of view is better and more stability.”

There were moves in both Greece and Italy to provide such political stability, with a new Greek government installed and Mr Berlusconi expected to be out of office by the weekend.

Claims that France and Germany were plotting a new “inner-core” of secure eurozone states were denied in Paris and Berlin.

And European Commission president Jose Manuel Barroso led calls for the EU to “unite or face irrelevance”. He said the key was to deepen euro-area integration without creating divisions with those who are not yet in it.

If the euro area of the 17 single-currency member states, or the entire 27-country EU, broke apart, he said, the estimated initial cost was up to 50 per cent of EU GDP, with ongoing threats to the prosperity of the next generation.

Meanwhile, Mr Cameron underlined that it is not in British interests for the eurozone to break up or for any countries in the eurozone club to leave.

“We have to keep the British economy safe, to take the British economy through this storm. That means preparing for all eventualities.” he said.

Analysts remained unimpressed by the political leadership in Europe questioning the defence of Greece within the currency.

John Higgins at Capital Economics said: “There is a real risk that a ‘disorderly’ default could take place, triggering even bigger write-downs for banks and the risk of further contagion

“There could be a full-scale credit crunch as depositors shifted money out of Italian banks for fear of losing out from redenomination if Italy then left [the euro].”

There was some cheer on the other side of the Atlantic. The number of people who applied for unemployment benefits in the US last week fell to the lowest level since April, which suggests employers could be stepping up recruitment.

Elsewhere, figures showed the US trade deficit fell in September to the lowest point this year as sales of American-made cars, aeroplanes and heavy machinery pushed exports to an all-time high.