A year of complete stagnation awaits the euro zone economy in 2012, according to a Reuters poll of economists, who said a recession has already started that will last until the second quarter of next year.
In the first poll of economists taken since EU leaders took an historic step towards fiscal union at a summit last week, economists lopped half a percentage point from their forecast for annual growth in 2012, leaving it at zero.
The survey made clear the pact would not ease the debt crisis now in its third year, and there is real worry among economists that nothing is being done by leaders to stimulate the growth needed to restore euro zone public finances.
While the European Central Bank will do its part by cutting interest rates to 0.75 per cent next year, below the 1.0 record low first set in 2009 and to which it returned this month, it seems little can be done now to avoid a recession.
The poll showed the euro zone economy would contract 0.3 per cent in the current quarter and another 0.2 per cent in January-March, before a meagre recovery in subsequent quarters.
With financial market reaction to last week's summit signalling no abeyance in the debt crisis, the potential for a far worse outcome still exists.
"It is vital that euro zone policy makers get a real grip on matters quickly," said Christian Schulz, senior economist at Berenberg Bank.
"If Greece suffers a messy debt default (or) Italy and Spain face extended punitive high market interest rates, this could potentially lead to extended, serious recession in the euro zone."
Italy sold €3-billion of five-year government bonds on Wednesday at an eye-watering euro-era high yield of 6.47 per cent, in what analysts said was a decent result given the circumstances. By contrast, an auction of two-year German bonds produced yields of 0.29 per cent.
The number of economists betting on a contraction in the first quarter of next year has more than doubled since the November poll, from 14 to 29 in December.
One contributor, London consultancy Capital Economics, saw the euro zone economy contracting in each of the seven quarters from now until mid-2013.
Purchasing managers' indexes released earlier this month tallied with a 0.5 per cent contraction for the euro zone economy in the present quarter, with private sector activity nosediving in countries like Spain and Italy.
Last week, the ECB projected annual gross domestic product next year at somewhere between a contraction of 0.4 per cent and 1.0 per cent growth.
A firm majority – 31 out of 34 – said last week's fiscal pact alone would not be enough for the euro zone to move past the worst of its debt crisis, which is choking off funding for Italy and Spain, the bloc's third and fourth largest economies.
That puts the pressure back on the ECB to come up with radical ways of fighting the crisis, despite the central bank's continued stern opposition to ramping up its purchases of euro zone government bonds.
While quantitative easing (QE) still looks unlikely, a Nov. 30 poll showed most analysts think the bank will eventually become lender of last resort, like its U.S., British and Swiss counterparts.
So far the ECB has refused to conduct outright QE, or print money, instead offsetting its government bond buying with operations aimed at draining the excess liquidity added by its purchases out of the financial system.
"The move decided towards fiscal union can contribute to calm market fears, but not quickly," said Jean-Louis Mourier, economist at Aurel BGC.
"Despite the hardening of its official speech, the ECB will be there to avoid any real 'accident' until the strengthening of the euro area governance becomes a reality."
The poll showed a 20 per cent chance of one or more countries leaving the euro zone.
Growth prospects look better in neighbouring Britain, isolated within the 27-member European Union after it rejected a treaty change aimed at tightening fiscal rules for countries using the euro, but it still faces a 50-50 chance of recession.
The ECB will cut interest rates to 0.75 per cent in second quarter of next year, and then keep them on hold for at least a year, the poll found – a big change from a Nov. 29 survey that showed it sticking at the current record low 1.0 per cent rate.