EUROPE'S ECONOMY is to emerge from recession this year and grow by 0.7 per cent next year, according to revised data from the European Commission.

The figure marks an improvement of 0.8 per cent on April estimates, which predicted negative growth in 2010. However, the EU economy will contract by 4.1 per cent this year, 0.1 per cent worse than originally predicted, due to negative third-quarter activity in Britain. But by 2011 it will stabilise, leaving no country in negative territory - rising by 1.6 per cent in the EU and 1.5 per cent in the 16-country euro zone.

"The EU economy is coming out of recession," the union's economics chief Joaquin Almunia told journalists yesterday at the launch of the EU's regular quarterly forecast. "This owes much to the ambitious measures taken by governments, central banks and the EU that have not only prevented a systemic meltdown but have kick- started the recovery."

He said the upturn was dependent on cleaning up the banking sector and restoring credit flows to businesses. Two of the EU's largest economies - France and Germany - emerged from recession in the second quarter of this year. The UK is expected to come out by the end of 2009, while Ireland looks set to emerge in 2011 when it should post a 2.6 per cent growth in GDP.

The results allow the commission to stand firmly behind a 2011 deadline to start reining in emergency spending, which Mr Almunia will recommend to EU finance ministers in Brussels next week.

Some countries - including Ireland, Greece, France and Spain - have already been told to start cutting budget gaps dating back to 2008. Deficits will reach an average of 6.9 per cent of GDP across the bloc this year and could hit 7.5 per cent next year if left unchecked, more than double the EU's 3 per cent limit.

By the end of this year, 20 of the EU's 27 countries will have deficits in excess of 3 per cent. Finance ministers agreed last month that cuts amounting to at least 0.5 per cent of GDP would be needed from 2011. Gross debt is also on the rise across the bloc, hitting 73 per cent of GDP this year, rising to 79.3 per cent next year and 83.7 per cent in 2011, well above the EU's 60 per cent limit. The increase is more pronounced in the 16 countries using the euro, which will see debt rising from 78.2 per cent of GDP this year to 84 per cent next year and 88.2 per cent in 2011.

Unemployment will reach 10.7 per cent in the euro area next year and 10.3 per cent in the EU as a whole, an improvement on April estimates - although Mr Almunia said the crisis had effectively "destroyed" employment levels in Europe, which will remain near zero until after 2011.

Separately yesterday, the International Monetary Fund said global interest rates may need to rise by as much as 2 percentage points to rein in increasing debt levels in major advanced economies. The IMF said government debt in the major economies is projected to reach 118 per cent of gross domestic product in 2014.

Carlo Cottarelli, director of the IMF's fiscal affairs department, said higher interest rates would dampen economic growth over the medium term and crowd out economic activity of the private sector.

Originally published by SARAH COLLINS in Brussels.

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