According to the European Commission's latest estimates, gross domestic product (GDP) in the 27-nation bloc is expected to grow by 0.2 percent in the third quarter and 0.1 percent in the fourth after contracting sharply in the first half of the year.

Overall EU GDP for the year was expected to shrink by 4 percent, which is in line with previous estimates.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said a sharp upturn in the global economy meant "the drop is behind us" but added that it was based mainly on stimulus measures that "would not be there forever."

In addition, Almunia warned that "unemployment levels will continue to go up and employment levels will continue to decrease, since the negative impact on the labor market has a lag of two or three quarters."

His comments came as the latest EU figures were released, showing that the number of people unemployed in the bloc had decreased by 0.6 percent, or 1.44 million, in the second quarter when compared to the first.

Call for training schemes to help unemployed

The commissioner said governments should provide training schemes and promote "active labor market policies" designed to ensure that the unemployed can find a job once the economy fully recovers.

EU governments have pumped billions of euros into their economies to mitigate the impact of the bloc's worst recession in decades.

According to Almunia, additional discretionary spending will have totalled 2.5 per cent of the EU's GDP over the 2009-10 period. If "automatic stabilizers" such as unemployment benefit payments are also taken into account, the size of the EU's stimulus package will have amounted to 5.5 per cent of GDP by next year.

But with this additional spending leading to ballooning budget deficits across the EU, Almunia once again urged governments to start thinking about how to rein in public spending.

"We need to define a clear, credible and coordinated 'exit strategy' to put public finances progressively back on a sustainable path and to find the necessary resources to increase Europe's growth and jobs potential," Almunia said.

The governments of Ireland and Spain are among those that have already announced tax hikes in order to reduce public debt.

Too early for real optimism

Almunia insisted that Monday's figures should be treated with "a mix of optimism and prudence," noting that the speed of the recovery would depend on a number of factors, including the fragility of the financial sector and the impact of weak labor markets.

Monday's interim forecasts were based on the outlook for Germany, Spain, France, Italy, the Netherlands, Poland and Britain, which together account for 80 per cent of the EU economy. Of these, only Spain was expected to remain in recession until at least 2010.

Germany is expected to lead the recovery with the greatest third-quarter gain, with Italy showing "gradual improvement" and Britain making a "return to positive territory before the year's end," Almunia added.

mrm/dpa/Reuters/AFP
Editor: Susan Houlton