The eurozone crisis is dragging down growth in the second half of the year but not to the point of recession, the EU said on Thursday as finance ministers headed to key talks on solutions.
EU Economic Affairs Commissioner Olli Rehn said the economy was set to come to a "virtual standstill" in the second half of the year, but he assured that Europe would avoid another recession.
"The outlook for the European economy has deteriorated," Rehn told a news conference releasing a European Commission interim report on the economy. "We are expecting a stalling of economic growth but not a recession."
Although the growth forecast for 2011 remained at 1.6 percent, it will slow to 0.2 percent in the third quarter and a mere 0.1 percent in the final three months of the year, worse than previously thought.
EU finance ministers meet in Wroclaw, Poland, for dinner on Thursday ahead of two days of talks centred on a new Greek rescue package that was agreed by eurozone leaders in July but has yet to be implemented.
In a sign of deep concerns about the global impact of the crisis, US Treasury Secretary Timothy Geithner will join his EU counterparts in Poland on Friday to deliver a rare address by an outsider.
Stock markets and the euro have rallied after France and Germany issued a joint fighting defence of Greece late on Wednesday in the face of market expectations it might default.
Greek Prime Minister George Papandreou also promised to apply overdue measures required if Greece is to obtain the next slice of rescue money.
The EU also took a step closer to toughening its deficit and debt rules, long ignored by governments, after the European Parliament and EU states reached a compromise on legislation to tighten budget discipline. The deal will be presented to the ministers in Poland.
While Germany's growth prospects improved to 2.9 percent for 2011, they worsened in Italy (from 1.0 percent in a previous forecast to 0.7 percent), France (from 1.8 percent to 1.6 percent) and the Netherlands (from 1.9 percent to 1.7 percent), according to the commission.
"Recoveries from financial crises are often slow and bumpy. Moreover, the EU economy is affected by a more difficult external environment, while domestic demand remains subdued," Rehn said.
"The sovereign debt crisis has worsened, and the financial market turmoil is set to dampen the real economy."
The European Commission said that weakening global demand and trade over the summer, and signs that the recovery lost steam in the United States over the summer, also contributed to Europe's economic slowdown.
Top European officials are fighting speculation that Greece will go bankrupt, or worse, be forced to abandon the euro.
German Chancellor Angela Merkel and French President Nicolas Sarkozy declared their full support for Athens after a teleconference with Papandreou.
Merkel and Sarkozy "are convinced that the future of Greece is in the eurozone", the French president's office said.
"The Greek prime minister confirmed his absolute determination to put in place all the necessary measures to carry out all of the commitments made."
EU and IMF auditors have returned to Athens to examine whether Greece is following up on austerity measures demanded in return of the next installment of a 110-billion-euro ($151 billion) bailout agreed last year.
A new 159-billion-euro lifeline also hangs in the balance.
There is uncertainty too as to whether enough banks will express interest in an initiative to ease Greece's huge debt burden by agreeing to exchange maturing bonds with longer-term obligations.
Sarkozy and Merkel stressed in a statement that "now more than ever it is indispensable" to implement the measures agreed at the July 21 eurozone summit aimed at stabilising the eurozone.
At that meeting, eurozone leaders approved the second Greek bailout as well as increasing the amount and the powers of the eurozone's temporary bailout fund, the European Financial Stability Facility (EFSF).
The talks Poland could prove decisive in breaking the deadlock over a demand by Finland for Greek collateral.
Prompted by increasing anti-European sentiment at home, Helsinki made that a condition for approving the new EU bailout.
The move has proved divisive and threatens to unravel a deal that already risks being delayed, as some countries have signalled they may not approve it for months.
Merkel this week sought to put out the fire caused by several German officials' comments that an orderly insolvency for Greece or even a eurozone exit was possible.