E.U. slashes growth forecast as Italy’s woes consume continent

BERLIN — The European Union warned Thursday that the economic troubles plaguing it are likely to continue, slashing its euro zone growth forecast and warning that a recession could soon be coming.

The news came on a day when Italy’s political and economic crisis continued to consume the continent and Greek politicians remained mired in talks over the next prime minister.

Asian markets closed sharply lower on worries that Italy’s borrowing costs were spiking out of control, though European markets were mixed in morning trading.

“Growth has stalled in Europe, and there is a risk of a new recession,” European economic and financial commissioner Olli Rehn said in a statement. “No real improvement is forecast in the unemployment situation in the E.U. as a whole.”

The European Commission, the E.U.’s executive body, predicted 2012 growth of just 0.5 percent in the 17 countries that use the euro, down from spring forecasts of 1.8 percent. Unemployment is predicted to remain at 9.5 percent.

The gloomy figures underscore worries that Europe, barely out of the previous recession, could soon sink further into economic malaise. Italy’s debt yields have skyrocketed in recent days, past the levels at which Greece, Portugal and Ireland were forced to seek bailouts, and a one-year treasury bill auction on Thursday saw the highest yields in 14 years.

Italy raised $6.8 billion in the debt auction, at rates of 6.1 percent, up from 3.6 percent a month ago. Some of Italy’s underlying economic indicators remain solid. The concern is that if investors decide that the country is not able to make economic overhauls that jolt it out of stagnant growth, they will drive up its borrowing costs to unsustainable levels.

Prime Minister Silvio Berlusconi has said he will step down after the parliament passes economic reforms, but it remains unclear when precisely he would leave. On Thursday, Italian news reports suggested his departure could come within days, and indicated economist and former European Commissioner Mario Monti was a leading candidate to form a national unity government to usher austerity measures through the country.

Asian markets plunged Thursday. Japan’s Nikkei 225 index fell 2.9 percent to close at a five-week low of 8500.80. Hong Kong’s Hang Seng dived 5.3 percent to 18963.89. South Korea’s Kopsi fell 4.9 percent and Australia’s S&P/ASX dropped 2.4 percent.

European markets were mixed in mid-day trading Thursday. Britain’s FTSE 100 fell 0.4 percent. Germany’s DAX was up 0.4 percent, recovering from an early morning plunge. France’s CAC-40 was 0.1 percent higher. Futures on Wall Street predicted a slightly higher opening.

Top euro-zone officials have moved aggressively to whip errant members into shape — sending international monitors to watch Italy’s economic measures and threatening to expel Greece from the euro zone.

But their exhortations have provoked pushback from Italy and Greece, and analysts warn that heavy-handed pressure may do little to solve Europe’s short-term problems.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.
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