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Euro zone’s ‘North-South divide’ to widen further

Sean Gallup | Getty Images

Economic differences between the euro zone's core and periphery are their most marked in over 10 years, according to a new report, and look set to widen as the region's nascent recovery takes hold.

Professional services firm Ernst and Young (EY) said that euro zone countries were now at their most economically divergent since the early 2000s, according to its "convergence indicator," which takes into account variables including gross domestic product, inflation, unemployment rates and government balances.

The gap can been seen in terms of growth – Germany's economy expanded by 0.7 percent in the second quarter of this year, but the economies of a number of countries, such as Spain and Italy, continued to shrink – as well across lending and employment.

(Read more: Almost 1 in 3 Europeans could be poor by 2025)

"Sharp differences in financing conditions and labor market developments will maintain stark divergence between euro zone countries," according to the EY Euro Zone Forecast, published on Thursday. "This poses a threat to efficient decision-making and further economic integration — both of which are necessary to ensure the euro zone's stability."

Despite this increasing divergence, however, EY was bullish on the growth prospects for the euro zone as a whole. It said the region's recovery would get a boost towards the end of this year on the back of improving economic activity in key trading partners the U.S. and U.K., and the easing-off of austerity measures in Europe.

It comes amid increasing hopes of a recovery in the euro zone following a string of positive economic data releases this summer, and after official data in August revealed that the euro zone grew by 0.3 percent in the second quarter from the first, signaling the end of the longest recession in continental Europe in over 40 years.

EY upped its growth expectations for the euro zone in 2013 to a 0.5 percent contraction, followed by growth of 0.9 percent in 2014. This forecast was more optimistic than that of ratings agency Standard & Poor's, which on Wednesday said it expected the euro zone's economy to shrink by 0.7 percent in 2013, before growing by 0.8 percent the following year.

(Read more: Barroso hails EU recovery, MEPs slam 'fairy tale')

"For the first time in eight forecasts we are predicting modest growth for the next quarter and the next year in the euro zone," Marie Diron, senior economic adviser to the EY Eurozone Forecast, said, but stressed that an uptick in the economic growth was expected to be slow.

Stubbornly high unemployment, for instance, looks set to hold back a number of euro zone countries. Joblessness averaged 12.1 percent in the euro zone in July, but increased to 24 percent among the under-25s.

EY said it expected unemployment in the region to continue to rise, peaking at 12.6 percent in the middle of next year, and warned that the "substantial divergence" in unemployment rates across the continent would persist. It said it expected joblessness in Spain and Greece to peak at 27.6 percent and 29 percent respectively in 2014 - while Germany's will be remain substantially lower at 5.4 percent.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop

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