BRUSSELS (Reuters) - Twelve European economies including Britain, Italy and France have deep weaknesses that are undermining growth and need to be tackled, the EU said on Tuesday as it stepped up its surveillance to avoid a repeat of the devastating debt crisis.
From a potential real estate bubble in Sweden to a sharp export downturn in Belgium, the European Commission pointed to what it considers major structural problems that leave 12 members of the 27-nation EU vulnerable to market attacks and global shocks.
"This is about tackling risky and harmful macroeconomic imbalances," said Olli Rehn, the EU's top economic official, as he made public the findings. "The procedure may look complicated but this is in the end a rather simple screening device."
The EU's executive will seek to look much more deeply into the economies of Belgium, Britain, Bulgaria, Cyprus, Denmark, Finland, France, Hungary, Italy, Slovenia, Spain, and Sweden.
EU countries receiving financial aid -- Greece, Romania, Portugal and Ireland -- were not part of the surveillance exercise, the first of its kind.
A failure to follow EU recommendations on how to face up to housing bubbles, persistent deficits, a chronic lack of competitiveness and excessive private and public debt levels could lead to fines and, for poorer EU members, a freezing of funds for economic development.
With the euro zone's debt crisis in its third year, the Commission report echoes World Bank and International Monetary Fund warnings in recent weeks that the European Union, which generates around 22 percent of global output, risks economic stagnation if policymakers do not act.
The International Monetary Fund forecasts a 0.5 percent contraction for the euro zone in 2012 that the Washington-based lender says could drag the world into recession.
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In a sign the EU's economies are diverging, the region's biggest - Germany - was not on the Commission's blacklist. After a brief fall in exports at the end of 2011, many economists expect it to avoid recession in 2012.
But France, Britain, Italy and Spain, the EU's other large economies, need to reform, the EU said.
France, which lost its prized AAA sovereign debt rating in January, has recorded one of the sharpest losses of market share in world exports in the EU in recent years and rising wages have made it increasingly uncompetitive, the report said.
The Commission said Italy's public debt, equal to about 120 percent of GDP, was a concern given its track record of weak economic growth. Investors worried about Rome's ability to manage its debt pushed spreads between Italy's 10-year bonds and comparable German Bunds to record levels in November and forced Silvio Berlusconi out of power.
Rome remains in the front line of the euro zone debt crisis with his successor as Prime Minister, Mario Monti, struggling to convince markets he can reform the Italian economy.
For Britain, which is outside the euro zone, a loss of export market share over the past decade, high levels of household debt and rising house prices are an issue for Brussels.
Moody's cited Britain's "materially weaker" growth prospects over the coming years as it warned the nation's AAA rating risked being downgraded, but finance minister George Osborne said London would stick to its debt-cutting measures.
That warning was part of a review overnight by the rating agency that cut a swathe through the euro zone economies.
It also signalled it may cut the triple-A ratings of France and Austria and downgraded six other European nations including Italy, Spain and Portugal, citing growing risks from the debt crisis.
"A correction is now under way ... and the deleveraging process has began," the Commission said in reference to efforts to tackle debt as well as house prices across the bloc. "It is unclear how far it will go and for how long it will continue."
Reporting By Robin Emmott; Editing by John Stonestreet