Eurozone still mired in recession

The figures completed a dismal year for the bloc, with the eurozone economy falling by 0.5 per cent over the course of 2012. Crisis hit Greece suffered the most, with a 6 per cent contraction over the course of 2012. However, Latvia, whose government announced its intentions earlier this month to become the next country to join the single currency, saw its economy grow by 5.7 per cent.

What will concern policy-makers most was the news that Germany and France, the eurozone's two largest economies, both saw declining output in the final months of 2012. Meanwhile, the Netherlands is now officially in recession after its second successive quarterly fall.

The dismal figures come after a number of EU leaders have voiced cautious optimism that the worst of the crisis may be over, with financial markets increasingly stable and narrowing bond spreads in the eurozone debt market.

The European Commission will publish its Winter Forecast next Friday (22 February) and is expected to give a mixed verdict on the state of the European economy.

In a letter to European finance ministers posted on the Commission's website on Tuesday (13 February), EU Economic commissioner Olli Rehn, said that economic growth would probably return in the second half of 2013. He cautioned that Europe's crippling unemployment rate, which currently stands at 12 per cent, was unlikely to fall. "There will inevitably be a lag before a strengthening of economic activity has an impact of job creation," he said.

Weaker economic forecasts are also likely to have a corresponding effect on national government targets to reduce budget deficits to the 3 per cent limit set out in the Stability and Growth Pact. However, Rehn raised the prospect of countries being given more time to meet the target if the economic climate remains severe.

"If growth deteriorates unexpectedly, a country may receive extra time to correct its budget deficit, provided it has delivered the agreed structural fiscal effort," he said.