Greece’s economy is in a “vicious circle” and will contract more severely than the government says, according to the country’s central bank.

The Bank of Greece (BoG) said economic output in 2010 will fall by 2%, worse than the government’s prediction of between 1.2% and 1.7%.

BoG says the recession will be worse due to planned public spending cuts.

The report comes ahead of a European Union summit which may discuss Greece’s economic crisis.

BoG said that it approves of Athens’ strategy to bring down the country’s budget deficit, but that the impact will be worse than first thought.

“The Greek economy has fallen into a vicious circle with only one way out: the drastic reduction of the deficit and debt,” the Bank’s annual monetary policy report says.

The report warned that the eurozone’s economic recovery remains fragile, having relied to a large extent on fiscal stimulus, which must gradually be reversed as it is leading to large budget deficits.

The report said: “The economic policy that has been announced is the start of this effort.

“Its efficient implementation will lead to a virtuous circle that will bring the Greek economy back on a sustainable growth orbit.”

European aid

Greece’s budget deficit last year was 12.9% of GDP, more than four times the limit under eurozone rules.

There have been conflicting reports about whether eurozone countries will discuss Greece’s plight at a summit on Thursday.

Germany has irritated some of its European partners with its opposition to a financial aid to help Greece overcome its debt crisis, believing that Athens itself can solve the problem.

German Chancellor Angela Merkel told Greek Prime Minister George Papandreou on Sunday that the European Union was ready to “do what is necessary to preserve the stability of the eurozone”.

Yet, in a radio interview, she said she opposed any move by EU leaders to take a firm decision on the Greek question at Thursday’s summit, as Greece does not need money at the moment.

Financial markets have intensified pressure on Greece, which must refinance more than 50bn euros (£44.8bn) in debt this year, including more than 20bn euros by the end of May.

Athens must now pay roughly twice the interest that Germany does to borrow money, and has asked the EU to either guarantee loans or lend money outright if Greece cannot raise the funds it needs at reasonable rates.

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