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Euro-area economy forecast to fall first time since launch

THE euro-area economy will contract for the first time since the currency was introduced a decade ago, the European Commission forecast, cutting its outlook for the region.

The economy of the 16 countries sharing the euro will shrink 1.9 percent this year, the Brussels-based commission said yesterday, revising a November estimate for growth of 0.1 percent. The forecast is bigger than the 0.5 percent contraction predicted by the European Central Bank last month.

The ECB last week reduced interest rates to match the lowest since the euro's launch in 1999 to tackle a recession that may see 11 of the euro-area economies shrink this year. Germany, France and Spain have orchestrated bank rescues and fiscal-stimulus packages to bolster their economies.

"The measures to stabilize 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," European Union Monetary Affairs Commissioner Joaquin Almunia said in a statement. They will "create the conditions for a gradual recovery in the second part of 2009."

The economic slump deepened in the fourth quarter, according to the commission, which estimates that gross domestic product shrank by 1.5 percent in the final three months of the year after a 0.2-percent contraction in the previous two quarters. The economy will continue to contract in the first two quarters of this year, it said.

Additional funds

The ECB has offered additional funds to banks as they nurse losses from the global financial crisis. German Chancellor Angela Merkel this month planned a second stimulus plan of as much as 50 billion euro (US$66 billion) that includes tax cuts and aid to the country's automobile industry, Bloomberg News said. France has approved a 26-billion-euro program.

The euro area will return to growth next year with a growth of 0.4 percent, the forecasts show. This year, Ireland will contract 5 percent, Germany 2.3 percent and economic output in Spain will drop 2 percent. The economy of the 27 countries in the EU will shrink 1.8 percent this year, according to the commission forecasts.

The United Kingdom, a member of the EU that doesn't use the euro, yesterday announced the second bank rescue in three months, proposing insurance to underwrite mortgage-backed debt and toxic assts. The government also gave the Bank of England authority to buy assets as a tool of monetary policy as the key UK interest rate approaches zero.


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