EU executive urges joint action, economy faces stall

BRUSSELS (Reuters) - The European Commission called on Monday for joint European Union action to boost the economy as its data showed the euro zone already in technical recession and that growth would come to a virtual standstill next year.

Euro zone finance ministers should discuss such coordination on Monday evening and again on Tuesday, when the rest of the 27-nation bloc's finance ministers join their monthly talks, Economic and Monetary Affairs Commissioner Joaquin Almunia said.

"We need coordinated action at the EU level to support the economy similar to what we have done for the financial sector," Almunia said, presenting his twice-yearly EU economic forecasts.

"National action is needed and national action is much more efficient when it is coordinated with a common vision and with a common discussion," he said.

Economic growth in the euro currency area will slow to 0.1 percent in 2009 from 1.2 percent expected this year, said the Commission, the EU's executive arm. It forecast 0.9 percent growth for 2010.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs the monthly meetings of the Eurogroup -- finance ministers from the 15-country euro zone and the European Central Bank -- expressed some support for coordinated policy.

"I'm in favor of putting together measures which are targeted at a certain number of sectors and political concerns," Juncker said before the meeting. "This has to be coordinated in the best way possible at the level of the Eurogroup."

But Dutch Finance Minister Wouter Bos rejected the idea of any EU-wide measures and said the main areas of economic policy coordination were the EU budget rules, called the Stability and Growth Pact, and the ECB.

"I don't think there are any EU-wide measures needed. Economic policy is at the core of national policy. We have a strong European Central Bank, which is a perfect instrument of coordination," Bos told reporters.

"We have a pact and that's our main instrument for economic policy coordination. I am not sure there is a need for a lot more coordination," he said.

The Commission encouraged those EU countries which can, to make full use of the flexibility built into the pact's rules to cushion the economic slowdown.

Bos also rejected France's idea of setting up a euro zone economic government as a partner for talks with the ECB -- a role played by the Eurogroup.

"We are not in favor of creating new European structures parallel to those already existing," Bos said.

OUTRIGHT EURO ZONE RECESSION POSSIBLE

The slowdown will boost unemployment to 8.4 percent of the workforce next year from 7.6 percent seen this year and to 8.7 percent in 2010, the Commission said.

It said EU economies were hit by the financial market crisis which was aggravating a housing-market correction in several countries at a time when external demand was rapidly fading.

"While the important measures taken to stabilize financial markets have begun to restore confidence, the situation remains precarious and the risks to the forecasts significant," it said.

The Commission estimates that euro zone GDP fell 0.1 percent in the third quarter of 2008 after a 0.2 percent contraction in the second, adding up to two consecutive quarters of negative growth -- a common definition of technical recession.

The economy is to shrink another 0.1 percent in quarterly terms in the fourth quarter, it said, and warned that a further worsening of conditions in financial markets could push the euro zone into an outright recession.

"A relatively moderate, 50-basis point, further increase in risk premium and a tightening of credit availability for households, not any longer a remote possibility, can trigger an outright recession -- a decline of 1 percent in GDP in 2009 -- in the euro area," the Commission said.

The Commission expects that the euro zone's three biggest economies, Germany, France and Italy, will stagnate next year while those of Ireland and Spain contract.

OUTLOOK BETTER THAN FOR U.S.

The euro zone outlook is still better than for the United States, whose economy the Commission forecasts to shrink 0.5 percent next year. The EU executive expects Japan to contract by 0.4 percent in 2009.

In the wider European Union, Britain's economy is seen shrinking 1 percent next year, the Baltic states of Estonia and Latvia will contract this year and next, and Lithuania will shrink in 2010, the forecasts showed.

Euro zone inflation is likely to slow to 2.2 percent next year from 3.5 percent seen this year and decelerate further to 2.1 percent in 2010, the Commission forecast.

The European Central Bank wants inflation to be just below 2 percent, but consumer-price growth was boosted by surging oil and food prices in the 12 months to mid-2008.

The bank has signaled it may cut interest rates in November as inflation risks have diminished, a prospect welcomed on Monday by BusinessEurope, an umbrella organization for some 20 million European companies.

The Commission said that investment, a key driving force in the previous upturn, faced a particularly abrupt slowdown, reflecting the impact of weakening demand, a drop in investor confidence, tighter financing conditions for companies, and lower availability of credit.

Consumption was set to stay subdued even though real disposable income growth was set to rebound as the inflationary impact of higher commodity prices fades.

Net exports, however, would contribute positively to GDP growth because imports would slow more than exports, partly thanks to the recent depreciation of the euro's real effective exchange rate, the Commission said.

(Writing by Jan Strupczewski, editing by David Brunnstrom and

Dale Hudson)