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Europe Lowers Growth Forecast for 2012

European Union Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference on the interim economic forecast at the European Commission headquarters in Brussels, Belgium, November 10, 2011.

Europe got more bad news on Thursday, as the European Union's executive arm sharply downgraded growth forecasts for the region. This has major implications for a continent buffeted by the financial and political crises in Italy and Greece.

The new figures predict economic growth across the European Union of only 0.6 percent next year - and just 0.5 percent in the 17-nation eurozone. That is substantially less than the 1.8 percent growth predictions earlier this year for the euro currency area.

European Economic and Monetary Affairs Commissioner Olli Rehn delivered a sober assessment of the region's problems at a press conference in Brussels.

"GDP is now forecast to stagnate around the turn of this year, with some member states, in fact, experiencing a contraction," said Rehn.

Rehn called on five EU members - Belgium, Cyprus, Hungary, Malta and Poland - to cut their budgets or risk facing sanctions. He also summed up international worries about the ailing region.

"Concern about the sovereign debt crisis in several euro-area member states, together with the weakening global economic conditions, have led to a sharp fall in confidence since April this year," said Rehn.

Rehn is only the latest official sounding a warning. International Monetary Fund chief Christine Lagarde is urging "clarity" from Italy and Greece, which face political as well as economic turmoil. And noting the sluggish growth and high unemployment in the United States, she is warning of a "lost decade" ahead for the world economy.

"Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability and a potential collapse of global demand," said Lagarde.

A Reuters report said officials from Germany and France have discussed a fundamental overhaul of the European Union, to create a smaller, more integrated eurozone group compared to the rest of the 27-member EU. Officially, however, both France and Germany say it is essential the eurozone remains intact.

Additionally, analyst Philippe Moreau Defarges, of the Paris-based French Institute of International Relations, said creating these two European systems would be problematic in practice.

"It's very difficult because the juridical issue… in English you say 'the devil is in the details' - I would say what is important is in the details. It means that, of course, you can imagine a very ambitious scheme, very ambitious modification on the paper, but when you want to implement that… it's much more difficult," said Defarges.

What is certain is that the eurozone crisis is likely to dominate the news here for the months to come, with pressure growing for European leaders to come up with a comprehensive and sustainable solution.