Growth in the euro zone could stutter to just 0.7 per cent in 2003, Mr Pedro Solbes, the European Union's monetary affairs commissioner, has warned.
Mr Solbes admitted it was improbable that the 1 per cent growth forecast made by the European Commission in April would be achieved.
"When we predicted 1 per cent growth in April we warned of risks to the downside and the upside. The downside risks have materialised," he said.
"It could be 0.7 per cent, but it depends on how the third and fourth quarters go," Mr Solbes added at a joint news conference on Saturday with Mr Giulio Tremonti, the Italian finance minister.
The latest downgrade in the growth forecast confirms the gathering gloom about the state of Europe's economy, which is feeding through into rising government deficits.
With Germany teetering on the brink of recession and other big euro-zone states such as France virtually stagnant, hopes of an accelerated recovery in the second half of 2003 may have to be put on hold.
The rising strength of the euro against the dollar has hit exporters, while Mr Wim Duisenberg, the European Central Bank's governor, gave no indication last week that another interest rate cut was imminent.
Europe's static growth has caused government borrowing to rise sharply, and Germany, France and Portugal have all breached the EU's stability and growth pact deficit ceiling of 3 per cent of gross domestic product.
Italy, which holds the rotating EU presidency, will give more details this week of its plans to boost growth, including proposals to increase research spending.
One proposal, to be made at a meeting of industry ministers on Friday in Rome, is that research and development expenditure should be excluded from deficit calculations under the stability pact.
The European Commission, however, is strongly against any move to get around the stability pact by exempting certain types of spending, and Mr Tremonti himself has said that such a move would not be possible.
European and Asian finance ministers, meeting in Bali at the weekend, meanwhile forecast an improved global economy in the near term.
The official optimism contrasted with an International Monetary Fund presentation that highlighted "downside risks" and said any global recovery would be gradual.
In a closed-door submission, obtained by Reuters, the IMF said: "In the short term, concerns include the after-effects of the bursting of the IT bubble, weak labour markets, the impact of Sars and ongoing worries about terrorism."
Meanwhile, Chancellor Gerhard Schröder has ruled out tax increases to finance the German government's sweeping income tax cuts, saying he was confident stronger economic growth would partially offset lost revenues.
The struggle to fill a €15.5 billion gap to be opened by next year's income tax cuts gained pace at the weekend, with Finance Minister Mr Hans Eichel warning a sharp rise in new borrowing was unavoidable, while other political leaders urged the sale of government gold and foreign exchange reserves.
"Taking out of the right pocket to put more in the left pocket isn't going to happen," Mr Schröder told Der Spiegel magazine to be published today, dismissing fears other taxes would be raised to compensate for the tax cuts.
Mr Schröder said the tax cuts would be financed through a combination of higher economic growth, reduced government subsidies, privatising government holdings and some new borrowing.
