The eurozone's economy will shrink by 0.3% this year and will grow by 1.4% next year, with job cuts, lacklustre investment and still tight lending conditions delaying the recovery, the European Commission said in its winter growth forecasts, published on Friday.
For the European Union as a whole, gross domestic product expansion is projected at just 0.1% this year and 1.6% in 2014.
Unemployment is seen at 11.1% in the EU and at 12.2% in the eurozone this year.
Although economic activity was "disappointing" in the second half of last year, leading indicators suggest that GDP in the EU is bottoming out and a pick-up in growth, initially driven by increasing external demand, is expected.
By 2014, domestic demand is expected to take over as the main driver of accelerating growth.
"The decisive policy action undertaken recently is paving the way for a return to recovery. We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation," Olli Rehn, Commission vice-president for economic and monetary affairs and the euro, said in a statement.
Among the risks to the outlook, the Commission cited "policy slippage" as the most prominent risk, as a resurrection of uncertainty because of waning support for structural reforms and fiscal consolidation could put the necessary adjustment in vulnerable countries in danger.
"Significant downside risks also stem from the external environment," the Commission said, mentioning "political gridlock" which is "still threatening to result in much sharper fiscal retrenchment in the US by the beginning of March."
"The impact of the recent euro appreciation on euro-area exports might be larger than usual in the context of firms' already compressed profit margins," it warned. The Commission also cautioned about the possibility of a vicious circle involving developing countries, with a prolonged slowdown in advanced economies having "immediate repercussions for emerging marketsvia the trade channel and vice versa."
A renewed slowdown in growth in the BRICS (Brazil, Russia, India, China, South Africa) countries could weigh on the outlook for other emerging markets and, eventually, on the prospects of EU exports, it said.
Another risk would be "an escalation of geopolitical tensions" which could end up in surging oil prices, according to the European Commission's forecast.
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