A top European official warned on Friday that the euro area economy would shrink for the second consecutive year and that countries like France and Spain would miss fiscal targets meant to ensure the stability of the common currency. Separately, the European Central Bank announced that the region’s banks planned to repay less than half the expected amount of low-interest loans they took out a year ago. And Moody’s Investors Service downgraded Britain’s government bonds from its top AAA rating.

The economic doldrums could set the stage for ripple effects for the United States, particularly in the financial markets.

“The straight growth channel in Europe is weighing on the U.S. right now, but the more important channel through which the euro area hits the U.S. is in financial markets, and problems that could affect consumer and business sentiment,” said Joseph Lupton, senior global economist at JPMorgan Chase. “Where it becomes a big deal is if there’s some other stress point, if something else flares up in the financial markets.”

Olli Rehn, the European commissioner for economic and monetary affairs, forecast growth across the 27-nation European Union of just 0.1 percent this year and a contraction of 0.3 percent among the 17 countries in the euro zone.

Mr. Rehn’s presentation signaled “another year of falling output and rising unemployment in store in 2013,” said Tom Rogers, a senior economic adviser at Ernst Young.

Prospects for growth in many parts of the European Union were “very disappointing,” Mr. Rehn acknowledged at a news conference, where he presented a so-called winter economic forecast prepared by his department at the European Commission, the bloc’s administrative arm.

“The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” Mr. Rehn said.

Just three months ago, the commission forecast that the euro area economy would grow by 0.1 percent this year, and other officials had talked about a turnaround starting this year.

Mr. Rehn said the European economy should resume expanding in 2014, with growth reaching 1.6 percent across the European Union and 1.4 percent in the euro zone.

In another sign of continued weakness in the financial system, European banks plan to repay less than half the expected amount of low-interest loans they took from the European Central Bank.

The central bank lent more than 1 trillion euros ($1.33 trillion) in two operations in December 2011 and February 2012. The cheap loans provided a life raft for the region’s banking sector, which ran into difficulty during the debt crisis. During the period of uncertainty, banks refused to lend to one another. Late last month, banks paid back 137 billion euros of the loans, more than expected, suggesting that at least some banks were able to raise money on their own.

But on Friday, the central bank said that banks that took the second round of loans planned to return 61 billion euros in the latest repayment, much less than many had expected.

Moody’s downgraded its rating on Britain’s debt to Aa1 from AAA, citing continuing weakness in the country’s medium-term growth outlook and rising debt burden. The rising debt means “a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016,” the agency said.

Britain has been cutting spending to pare its deficit but has failed so far to stimulate growth. Its economy expanded 0.9 percent in the third quarter but contracted 0.3 percent in the fourth quarter.

Standard Poor’s and Fitch Ratings still have AAA ratings on Britain’s debt, though their outlooks are negative.

The move comes after other prominent downgrades. Moody’s lowered France from its top rating in November. Before that, Standard Poor’s downgraded the United States from AAA in August 2011 and lowered France and Austria in January 2012.

In the euro zone, the European Commission also forecast that unemployment would continue to rise this year, to 12.2 percent, up from 11.4 percent in 2012.

David Jolly contributed reporting from Paris and Catherine Rampell from New York.

Article source: http://www.nytimes.com/2013/02/23/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss