The European Commission (EC) said yesterday (Monday) that the Eurozone economy has already slipped into a recession and strong and stable economic growth will not return until 2010. The European Central Bank (ECB), originally charged with the task of maintaining price stability, has now found itself with the added responsibility of encouraging growth and will likely cut interest rates later this week.

Gross domestic product (GDP) in the 15-nation Eurozone probably contracted by 0.1% in the third quarter after shrinking 0.2% in the second, the European Commission said. The executive branch of the European Union also lowered its 2008 forecast 1.2% as the economy contracts another 0.1% in the fourth quarter.

For all 27 EU countries, the commission expects the economy to expand 0.2% next year.

"The economic horizon has now significantly darkened as the European Union economy is hit by the financial crisis that deepened during the autumn and is taking a toll on business and consumers," EU Economic Affairs Commissioner Joaquin Almunia said in a statement. "In 2009, the EU economy is expected to grind to a standstill."

The EC predicted economic growth in the region will be a paltry 0.1% in 2009.  However, many analysts - including those with BNP Paribas SA (OTC: BNPQY), Citigroup Inc. (C) and Royal Bank of Scotland PLC (RBS) - believe even that figure is generous.

"A recession in 2009 seems now unavoidable," Jacques Cailloux, chief Eurozone economist at Royal Bank of Scotland, told Bloomberg. "Today’s new GDP forecast of 0.1% for 2009 by the European Commission still looks too optimistic to us."

The Eurozone Purchasing Managers’ Index - a measure of manufacturing output, new orders and volume of new export orders - fell for the fifth consecutive month in October, hitting a record low 41.1. A reading below 50 for the index represents contraction.

Unemployment in the Eurozone remained stagnant at 7.5% in September, but the EC expects the jobless rate to soar as high as 8.4% in 2009.

It’s likely that Germany, France and Italy have already entered into a recession, as their second-quarter GDP fell 0.5%, 0.3% and 0.3%, respectively.

The EU acknowledged that its forecasts for the Eurozone, as well as the economy of the 27-member European Union, could worsen if the credit crunch continues unabated.

Even slightly higher borrowing costs could significantly restrict the amount of credit available to households and "trigger an outright recession, a decline of 1% of GDP in the euro area," the EC said.

The only silver lining is what the EU predicts will be a marked cooling of inflationary pressures.