BRUSSELS - The EU economy will shrink nearly 2.0 percent this year as a severe recession drives unemployment and government deficits to levels not seen for years, the European Commission forecast Monday.
After growing 1.0 percent in 2008, the 27-nation economy of the European Union is poised to contract by 1.8 percent this year, the EU's executive arm said in a dramatic downward revision of its forecasts.
Predicting that the roots of recovery will only take hold in the middle of the year, the commission forecast that the EU would achieve economic growth of only 0.5 percent in 2010.
The outlook was marginally worse for the 16 countries sharing the euro, which the commission forecast would see their combined economy shrink by 1.9 percent this year after growing 0.9 percent in 2008.
The forecast marked a severe downward revision from the commission's last estimate in November, when it predicted that eurozone economy would eke out growth of 0.1 percent.
With the eurozone economy suffering from a 9.2 percent drop in business investment this year, it too would only begin picking up in the middle of the year before managing to grow 0.4 percent in 2010.
At the same time, unemployment will climb to levels not seen in Europe for over a decade as joblessness becomes once again a major headache for workers and politicians.
The commission forecast that the eurozone jobless rate would rise from 7.5 percent in 2008 to 9.3 percent this year and hit 10.2 percent in 2010 -- over the 10 percent mark for the first time since 1998.
With their economies in a tailspin, European governments pledged in December to pump a combined 200 billion euros (265 billion dollars) into a Europe-wide economic stimulus package.
However, some governments, including that of economic powerhouse Germany, have already come out with plans since then for even more stimulus or are considering doing so.
"The measures to stabilise the financial market, the easing of monetary policies and the economic recovery plans will enable us to put a floor under the deterioration of the economy this year," said EU Economic and Monetary Affairs Commissioner Joaquin Almunia.
As governments commit billions to trying to revive their economies and bail out their banks, public deficits will swell, ballooning in the eurozone from 1.7 percent of output in 2008 to 4.0 percent in 2009 and 4.4 percent in 2010.
However, the commission warned that some countries would see much more dramatic downturns than others, with the financial crisis and housing market crashes taking a heavy toll on the Irish and Spanish economies in particular.
Spain will see its unemployment rate surge from 11.3 percent in 2008 to 16.1 percent in 2009 and to a stunning 18.7 percent in 2010 while Ireland will see its deficit explode from 6.3 percent in 2008 to 11.0 percent in 2009 and 13.0 percent in 2010.
The huge jumps in goverment deficits has prompted credit rating agency Standard and Poor's to cut its rating on Greece's debt.
The agency on Monday lowered its rating on Spain's long-term sovereign debt by one notch to AA-plus from AAA following its warning last week on the country's rapidly slowing econony.
But Almunia dismissed concerns that the move targeting Greece was an ominous sign that the shared-currency block could break apart. He insisted it was normal for markets to demand different rates according to the perception of risks.
"I am not worried at all by those who have announced for 10 years in a row that the euro area will split. Honestly I dont think that this is a real hypothesis," he told journalists.