EU says eurozone economy to shrink in 2012

The Greek economy is expected to contract by 4.4% in 2012

The European Commission has predicted that the eurozone economy will contract by 0.3% in 2012.

In its previous forecast in November, it said that the economy would grow by 0.5%.

"The unexpected stalling of the recovery in late 2011 is set to extend into the first two quarters of 2012," the Commission said.

But it added that the 17-nation bloc would only have a "mild" recession and that it saw signs of stabilisation.

The Commission predicted that the economy of the wider 27-nation EU would be unchanged in 2012.

The biggest drag on the eurozone economy is expected to be Greece, which is now expected to see a 4.4% decline in output in the current year.

Greece and Portugal were the only economies the Commission expected to contract in their previous forecast in November.

Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia have now been added to that list.

"It's becoming increasingly difficult to look at the eurozone as a synchronised economic entity and this revised forecast trumpets the overall contradiction of a two-speed Europe," said Norval Loftus at Allegra Asset Management.

"It's a reasonable expectation that even a buoyant north - led by Germany - probably won't be enough to preserve a positive 2012 growth figure in light of the Greece and the other southern periphery countries."

Signs of stability

"Although growth has stalled, we are seeing signs of stabilisation in the European economy," said Olli Rehn, European commissioner for economic and monetary affairs.

"Economic sentiment is still at low levels, but stress in financial markets is easing."

But Mr Rehn said that many of the steps being taken around Europe that were limiting growth were essential for future financial stability and growth.

Spain is expected to contract by 1% this year, but the Commission warned that if its government brought in further budget cuts to meet its targets, the economy would contract by more than that.