Published: Tuesday, 3 Nov 2009 | 5:41 AM ET

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Europe's economy will rebound next year from a deep slump and accelerate in 2011, the European Commission said on Tuesday, paving the way for major deficit cuts across the 27-nation bloc from 2011 at the latest.

The European Union's executive arm forecast that the EU economy would expand by 0.7 percent in 2010 and 1.6 percent in 2011 after a contraction of 4.1 percent this year.

In the 16-country euro zone, growth would be 0.7 percent next year and 1.5 percent in 2011, after a 4.0 percent fall in 2009.

Armando Franca / AP Flags of member states of the European Union.

This is a strong upward revision from its forecast on May 4, when the Commission projected the euro zone to contract by 0.1 percent in 2010.

The European Central Bank forecast on Sept. 3 that euro zonegrowth would be between -4.4 and -3.8 percent this year and between -0.5 and +0.9 percent in 2010.

"The EU economy is coming out of recession. This owes much to the ambitious measures taken by governments, central banks and the EU that have not only prevented a systemic meltdown but have kick-started the recovery," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said in a statement.

The Commission said the euro zone emerged from recession in the third quarter with quarterly growth of 0.5 percent, a rate likely to slow to 0.2 percent in the fourth quarter.

"Once the underlying recovery has gained sufficient traction, i.e. in 2011,  a period of fiscal consolidation will have to follow to put public debt back on a sustainable footing," the Commission said in the statement.

To make sure the recovery does not falter, Almunia urged EU countries still to implement fully all announced support measures and complete the repair of the banking sector.

The recovery, however, is expected to be bumpy. The global economy will go through a soft patch in the first half of 2010 as temporary factors peter out, slowing euro zone quarterly growth to 0.1 percent in the first two quarters of next year, the Commission said.

The euro zone is likely to return to 0.5 percent quarterly growth in the second quarter of 2011, the Commission forecast.

EU finance ministers agreed on Oct. 20 and EU leaders backed them last Friday that if the Commission forecasts showed the recovery was strengthening and self-sustaining, deficit cuts
in all EU countries should start in 2011 at the latest.

They said that while differences in country situations should be taken into account, a number of countries should start cutting deficits earlier and most should cut by more than 0.5
percent of GDP a year.

Shoring up public finances is important to retain the confidence of markets and consumers in government policies after the worst economic downturn since World War Two inflated budget
deficits in many countries to unsustainable proportions.

In its twice-yearly economic forecasts, the Commission said that unless policies changed, the aggregate budget deficit in the euro zone would reach 6.9 percent next year and 6.5 percent
in 2011 from 6.4 percent seen this year.

This is more than twice the EU limit on budget deficits of 3 percent of GDP. Only Bulgaria will not breach that limit next year, and Sweden will move below the threshold in 2011, the forecasts showed.

Euro zone debt is likely to soar to 84.0 percent of GDP in 2010 from 78.2 percent seen this year and to 88.2 percent of GDP in 2011.

European Union finance ministers will discuss the Commission's forecasts and their implications for deficit-cutting next week.

The ministers are wary of withdrawing state support to the economy too early so as not to cripple the nascent recovery.

The Commission forecast unemployment in the euro zone would reach 10.7 percent of the workforce in 2010 and 10.9 percent in 2011, up from 9.5 percent seen this year.

After a dramatic fall of 17.9 percent expected this year, investment would continue to shrink next year by 1.3 percent in the euro zone and start growing by 4.1 percent in 2011.

The recovery in 2010 and 2011 is expected to be accompanied by inflation well below the ECB target of just under 2 percent, underlining market expectations the bank will not raise interest
rates from record lows of 1 percent until late 2010.

The Commission expects inflation in the euro zone to be 1.1 percent next year against 0.3 percent seen this year and 1.5 percent in 2011. The ECB forecast on Sept. 3 that inflation in
2009 would be between 0.2 and 0.6 percent and in 2010 between 0.8 and 1.6 percent.

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