The European Commission said the region’s economy probably entered a recession this year and will stagnate in 2009, increasing pressure on political leaders to collaborate on measures to tackle the financial crisis.

Europe heads to recession, budget gaps rise- EU

Economic growth in the euro zone will slump to 0.1 percent next year, the worst performance since 1993, the Brussels-based commission said on Monday.

Gross domestic product will shrink for three consecutive quarters this year and cut its forecast for full-year 2008 growth to 1.2 percent from 1.3 percent previously, the commission also estimated.

The commission said GDP in the euro zone will probably contract by 0.1 percent in both the third and fourth quarters after shrinking 0.2 percent in the second quarter, pushing the region into a recession, defined as two straight quarters of contraction.

“The economic horizon has now significantly darkened,” European Economic and Monetary Affairs Commissioner Joaquin Almunia said in today’s report. “We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector.”

BUDGET GAPS TO INCREASE

Euro zone budget gaps will rise over the next two years because of the sharp economic slowdown, the commission also said.

The aggregate budget deficit for the 15 countries in the euro zone would more than double to 1.3 percent this year, and rise to 1.8 percent in 2009 and 2.0 percent in 2010, it said.

“Most countries will be affected although with significant differences,” the commission said. “Uncertainties over the fiscal implications of the financial rescue packages also cloud the fiscal outlook,” it said.

Ireland, whose economy will contract this year and next, will see the biggest increase in the deficit to 6.8 percent next year from 5.5 percent seen this year and to 7.2 percent in 2010.

France, warned by the commission earlier this year that it needed to do more to bring its deficit down, is expected to have a budget gap of 3 percent this year and 3.5 percent in 2009, rising to 3.8 in 2010.

In 2010, Spain and Portugal would also breach the 3 percent limit with deficits of 3.2 and 3.3 percent respectively unless policies change. Greece will touch the limit with a 3 percent gap.

Other euro zone countries will stay safely below the 3 percent limit despite the economic slowdown and some, like Italy and Slovenia, are even likely to improve their budget balance in 2010 after a slight deterioration in 2009, the commission said.