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‘Unlike the Olympians who have thrilled us … our economy has not yet reached full fitness,’ says Bank of England Governor Mervyn King.

POOL/REUTERS

Darkening economic clouds over Europe are a powerful reminder that escape from the continent's debt crisis will likely take years, not months.

Britain's economy has lurched to a halt, France is heading back into recession and industrial powerhouse Germany is slowing noticeably, according to a flurry of fresh reports.

Bank of England Governor Mervyn King soberly warned Wednesday that Britain is facing up to three years of economic weakness, including no growth at all this year.

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"We are navigating rough waters, and storm clouds continue to roll in from the euro area," Mr. King told reporters in London after releasing the central bank's latest forecast.

In sharp contrast to the surprising success of British athletes at the London Olympics, he said the economy is weak and underperforming. "Unlike the Olympians who have thrilled us … our economy has not yet reached full fitness," Mr. King said.

Meanwhile, the Bank of France said the economy would shrink for a second-consecutive quarter in the June to August period. And in Germany, industrial production and factory orders were both down in June, demonstrating that even Europe's economic leader isn't immune. Much of southern Europe is already mired in recession.

"The road to recovery is likely to be a long and arduous one," said analyst Michael Hewson of CMC Markets.

That sentiment was echoed by Mr. King, who warned that the euro zone debt crisis will continue to weigh on the global economy for some time.

"It's a saga that goes on, and on, and on," he said. "And the idea that we've come to an end of it, I think seems to me entirely unrealistic. There's a very long way to go."

After several days of rising optimism in financial markets, both European stocks and the euro were in retreat Wednesday – a reflection of deteriorating economic conditions.

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Economic weakness in both Britain and the 17-country euro zone is ratcheting up pressure on central banks to keep priming the pump with low rates, bond purchases and other unconventional monetary tools.

For now, central bankers appear reluctant to do anything too radical. Mr. King, for example, insisted there's no immediate need to cut interest rates or print money in Britain. And European Central Bank president Mario Draghi is facing a delicate balancing act between what Germany wants and the rescue sought by many of the weaker economies.

Now with some of the healthier economies faltering, many analysts say more action is exactly what's needed, and soon.

"It may take a further major escalation of the euro zone crisis to persuade central banks in Europe to adopt expansionary policies," Andrew Kenningham, senior global economist at Capital Economics, acknowledged in a research note. "This would be one more case of crisis management rather than an effort to achieve a sustained recovery."

Mr. Kenningham said both the BoE and the ECB have plenty of ammunition left – if they choose to use it. They could, for example, lower interest rates, set negative interest rates on excess reserves, as well as expand asset purchases beyond sovereign bonds to include mortgage-backed securities and corporate bonds.

CMC Markets' Mr. Hewson said time is not on Europe's side. And the worse economic conditions get, the more intense the pressure on the ECB to act, he suggested.

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"It is becoming abundantly clear that EU leaders have no coherent strategy for growth, apparently content to bicker amongst themselves about the bailouts and austerity," he said.

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ECONOMIES IN TROUBLE

Britain

Flirting with recession* Zero growth this year in Britain, versus the 0.7-per-cent increase predicted just three months ago, according to a new Bank of England forecast.

* 2013 GDP forecast cut to 1.7 per cent from 2.1 per cent.

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* BOE Governor Mervyn King says the recovery will be a "long, slow process."

France

Likely in recession

* GDP to shrink 0.1 per cent in the three months to September, equalling the estimated second-quarter drop, Bank of France says.

* Trade deficit widens as exports of cars and transport equipment to rest of Europe drop.

Germany

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Slowing

* Industrial output down 0.9 per cent in June

* Factory orders down 1.7 per cent in June

* Fitch Ratings reaffirms triple-A credit rating, but warns of rating pressure if European economy weakens further or bailouts costs escalate.

Italy

Full-blown recession

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* GDP dropped 0.7 per cent in the second quarter, a fourth-consecutive quarterly decline.

* Retail sales and factory output falling sharply.

Barrie McKenna

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