The eurozone economy is expected to stagnate in 2013, after shrinking by 0.4% this year. And the broader European Union is expected to see a contraction of 0.3% this year.
Rising unemployment, higher taxes and reduced government spending will offset the positive effect of a gradual recovery in net exports from the 17 eurozone nations, the European Commission said in its latest economic forecasts.
"Given the weak starting point, GDP in 2013 as a whole is projected to grow by only 0.5% in the EU and to remain broadly stable in the euro area," it said, projecting eurozone GDP growth of just 0.1% next year.
The International Monetary Fund last month forecast eurozone growth of 0.2% in 2013.
Germany, Europe's biggest economy, no longer appears immune from the crisis engulfing some smaller members of the EU.
The European Commission said it expected the German economy to slow further in the second half of 2012 due to weaker export markets and investment activity, a view echoed by ECB President Mario Draghi.
"Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy," Draghi said in a speech Wednesday in Frankfurt.
German GDP growth would slow to 0.8% in 2012, down from 3% last year. It would only manage 0.8% growth again next year, according to the Commission's forecasts.
German industrial production shrank 1.8% in September after declining 0.4% the month before, the economy ministry said Wednesday.
"Overall economic activity is weak and it is expected to remain weak in the near term. And the growth of money and credit are subdued," Draghi said, adding the ECB expected eurozone inflation to fall below 2% next year.
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