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Euro Area Faces Recession as Breakup Risk Remains, E&Y Says

The euro-area economy is likely to slip back into a recession and its leaders’ new plan to end the debt crisis hasn’t completely eliminated the risk of a breakup of the currency region, according to Ernst & Young LLP.

The economy of the 17 nations using the euro will probably shrink in the current and next quarters, the group said in a report published in London today. The economy will barely grow in 2012, with E&Y forecasting expansion of just 0.1 percent.

European Union leaders agreed at a Dec. 8-9 summit in Brussels to tighter control of tax and spending by governments that overstep the bloc’s deficit limit of 3 percent of gross domestic product. They also pledged a faster start to a 500 billion-euro ($659 billion) rescue fund. Standard & Poor’s and Moody’s Investors Service are reviewing the agreement and its implications for credit ratings on euro countries.

“The latest developments in Greece, Italy and Spain and the European agreement lower the risk of a breakup of the euro zone,” said Marie Diron, an economist at Oxford Economics and adviser on the report. “This risk remains, however, especially since in 2012 very large amounts of sovereign debt require refinancing which could cause tensions.”

The euro snapped a three-day decline against the dollar to trade at $1.2993, after yesterday falling to its lowest since January.

Struggling Recovery

Industrial production declined 0.1 percent in October after a 2 percent drop the previous month, data released yesterday showed. Manufacturing and services shrank for a fourth month in December, London-based Markit Economics said today. Its composite index of both industries rose to 47.9 from 47 in November, where a reading below 50 indicates contraction.

A separate report showed that employment fell 0.1 percent in the third quarter, the first decline in almost two years.

E&Y sees euro-region expansion accelerating at the end of 2012 and forecasts growth of between 1.5 percent and 2 percent from 2013. Still, that won’t be enough to reduce unemployment to below 10 percent until 2015, it said.

European leaders have set a deadline of March to flesh out their new fiscal rules aimed at strengthening the euro area. E&Y said that “ongoing doubts” about the ability of some countries to implement reforms will mean that the European Central Bank will need to keep buying government bonds.

“With bond markets very volatile, weak growth prospects and high borrowing requirements in 2012, the ECB is likely to have to consider acting as a lender of last resort if even deeper problems -- perhaps even a split in the euro zone -- are to be avoided,” Diron said.

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