BRUSSELS, July 2 (Xinhua) -- The global financial crisis has dragged the economy of the European Union (EU) into a deep recession in the first half of this year, but there are signs that the worst may be soon over though the way to recovery is tortuous and bumpy.
V-SHAPED RECOVERY
In one of its two most important forecasts each year, the European Commission predicted in May that the EU economy would follow a "V-shaped" recovery pattern with high possibility of passing the rock bottom around the end of the year.
According to the commission, the EU economy was further worsening in the first quarter of this year due to the unfolding financial crisis, but very likely at a lower pace and a recovery is expected to take hold next year.
"With the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010," it said.
Official figures released by the EU's statistics office Eurostat showed that the combined economy of the 27-nation bloc contracted by 2.4 percent in the first quarter of this year, while the Eurozone economy shrank by 2.5 percent, the worst quarterly drop since the single currency club came into being a decade ago.
"The good news is that the first quarter GDP data are old news and the latest data and survey evidence are consistently indicating that the rate of economic contraction is now moderating substantially," said Howard Archer, chief European economist at IHS Global Insight.
The commission said early this week that the Eurozone economy is starting to show some initial signs of improvement thanks to substantial banking support and the fiscal stimulus measures implemented by national governments.
Surveys showed that Eurozone economic confidence continued to enhance in June for the third month in a row after reaching record lows in the past year, strengthening the case for a gradual ending of the worst recession since World War II.
"Economic activity over the remainder of this year is expected to remain weak but should decline less strongly than was the case in the first quarter of 2009," European Central Bank President Jean-Claude Trichet said on Thursday.
"Looking ahead into next year, after a phase of stabilization, a gradual recovery with positive quarterly growth rates is expected by mid-2010," he added.
EXIT STRATEGY
In face of the positive signs, the EU is calling for an exit strategy to phase out economic stimulus and start consolidating public finance.
"It is important that consolidation keeps pace with economic recovery. There is a clear need for a reliable and credible exit strategy, among other things, by improving the medium-term fiscal framework and through coordinated medium-term economic policies," EU leaders said in a statement after last month's summit.
After spending massive money on financial bailouts and fiscal stimulus, the EU fears that the swelling budgetary deficits would make itself ill-prepared for an aging society that is soon to come.
So far, the EU and its member states have committed more than 600 billion euros (846 billion U.S. dollars) on fiscal stimulus measures, equivalent to 5 percent of the GDP over 2009 and 2010, and this does not include the measures to support banks.
A large number of EU countries have seen their budgetary deficits go beyond the EU limit. Under the EU's stability and growth pact, a member state has to bring its deficit below 3 percent of its GDP.
"Past experiences teach useful lessons of how fiscal costs of banking crises can be contained and which factors can facilitate ringing the fiscal houses back in order. The effectiveness of the fiscal policy stimulus in the short run crucially depends on a credible commitment to withdraw the stimulus when the recovery is well established," said EU Economic and Monetary Affairs Commissioner Joaquin Almunia.
"We cannot afford to get out of this recession creating big imbalances that will be at the origin of the next crisis," he warned.
"WE ARE IN UNCHARTED WATERS"
Archer, however, noted that the European economic outlook is still far from bright and sustainable recovery is unlikely until 2010.
"Sharply rising unemployment is a particular threat to recovery hopes, while global economic activity and trade is still depressed despite some signs of recent improvement, credit conditions remain tight, financial sector problems persist and business and consumer confidence is still very low by long-term norms," he said.
Official figures from Eurostat showed that the unemployment rate in the euro zone hit a decade high in May, reflecting the current economic woes which forced companies to cut jobs amid shrinking demand, while the rate within the EU has also jumped to a record level since June 2005.
The commission has predicted that the ongoing economic crisis will leave an additional 8.5 million people jobless in the EU in 2009 and 2010.
With the unemployment rate set to climb to 10.9 percent, the euro zone will see a record jobless rate of 11.5 percent in two years.
At the summit last month, EU leaders were cautious about their optimism. They shied away from saying that there are initial signs of sustainable recovery, which had been included in a draft conclusion.
Trichet warned that policymakers must remain alert to financial risks despite initial signs of slower economic decline.
"While there are first signs that the pace of economic weakening is decelerating, we must remain alert. We are in uncharted waters, and there are still risks of a sudden emergence of unexpected financial turbulence," he said.
Special Report: Global Financial Crisis
