Merkel sept12
German Chancellor Angela Merkel attends a session of the Bundestag (lower house of parliament) on September 12, 2012 in Berlin. The storm clouds are gathering over the European economy. The European Commission says the economy in the European Union will shrink this year and that next year it will only barely grow. - 

The storm clouds are gathering over the European economy. The European Commission  has sharply cut its growth forecasts for the 27 countries that make up the European Union, and its dire predictions have coincided with some worrying output figures from  the continent’s economic powerhouse -- Germany.

The commission says the EU economy will shrink by 0.3 percent this year and will barely haul itself out of recession next year. For  the 17 countries that use the euro currency, things look even worse. The downturn there is expected to deepen.

Bob McKee of Independent Strategy,  a research house, says it’s the debt crisis taking its toll. He blames the cuts in public spending, which some governments in the eurozone have been forced to make in order to reduce their debts.

“The driving down of the debt levels  in the g overnment sector is reducing the ability of the economy to grow and making things worse," he says. "So we’re in a bit of a spiral there."

Most worrying for Europe is that the region’s economic locomotive is running out of steam. Germany’s great export machine is sputtering, and the country’s manufacturing output saw its sharpest fall in six months. The decline is partly due to the slowdown in China, but David Owen of Jefferies International Bank mainly blames problems closer to home.

“The weakness in the eurozone economy is beginning to pull Germany back down again," Owen says. "And it’s quite clear that Germany as well could be in danger of sliding back into recession. “

This prospect is focusing European minds on the world’s biggest locomotive -- the American economy. If the U.S. falls off its fiscal cliff at the start of 2013, it will drag down Europe’s fragile economy even further, making the latest grim forecasts look rather rosy.