Businesses see fragile euro zone recovery in 2010

The euro zone's economy is forecast to stage a modest recovery in 2010 as firm exports and government investment compensate for weak consumer spending, Europe's top employers' group said on Monday.

The 16-country euro area's economy is expected to expand by 1.2 percent this year after shrinking 3.9 percent in 2009, Business Europe said. It forecast 2.0 percent rebounds in Germany and France in 2010, and a 0.6 percent fall in Spain.

"A sustained recovery momentum is still some distance away and several member states are expected to see a further contraction of economic activity in 2010" the group, representing 20 million firms, said in a statement.

"Robust demand from emerging economies will be a particularly important support factor for growth in Europe."

It added that it was counting on the European Central Bank (ECB) to maintain a loose monetary policy and special financial support measures amid a benign inflation outlook.

"A further extension by the ECB of its current collateral policy, that is accepting government debt rated BBB and above, would also contribute to alleviating tensions on capital markets without jeopardising the ECB's political independence or compromising its mandate" Business Europe said.

The group forecast that euro zone inflation would climb to 1.2 percent next year from 0.3 percent in 2009, well below the ECB's target of just under 2.0 percent.

It said governments would wind down fiscal stimuli as investors grew nervous about ballooning budget deficits. It forecast euro zone gross government debt increasing to 85 percent of GDP in 2010 from 79.3 percent last year. 

"Public interventions in the economy are reaching their limits. To sustain growth and job creation, Europe must restore the viability of public finances and implement far-reaching reforms" it said.

Private consumption will remain subdued, growing by 0.4 percent, compared with -3.9 percent in 2009, as joblessness expands, the statement said.

The euro zone's jobless rate rose to 10 percent of the workforce in December, its highest level since August 1998.