THE EURO zone economy is on the brink of recession, according to a closely-watched survey showing private sector activity contracted this month for the first time in more than two years.

The worse than expected deterioration in the euro zone purchasing managers’ indices (PMI) adds to evidence that the region’s recovery has gone into reverse. It increases pressure on the European Central Bank (ECB) to cut interest rates.

A study from the bank yesterday warned that the currency project is in danger due to member states’ runaway spending and the resulting sovereign debt crisis.

The study, perhaps the most strongly worded warning about the future of the euro by a central banker, was a parting shot from ECB chief economist Jürgen Stark, who resigned this month after opposing the bank’s policy of buying troubled countries’ bonds.

“Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of EMU [Economic and Monetary Union] itself,” the research paper said.

The report, published by the ECB but not officially endorsed by it, called for compulsory fines on states that run deficits above 3 per cent of GDP and “financial receivership where adjustment programmes do not remain on track”.

According to the PMI data, economic prospects in the euro zone have been hit by sharp falls in confidence amid the escalating debt crisis.

Adding to the gloom, euro zone new industrial orders tumbled by 2.1 per cent in July compared with the previous month – suggesting production would also slow in coming months. June saw a 1.2 per cent fall, according to Eurostat.

Christoph Weil, economist at Commerzbank in Frankfurt, said forward-looking euro zone economic indicators were “dropping like a stone” and a recession was “dangerously close”. – Copyright The Financial Times Limited 2011 / Reuters