El-Erian: Another warning signal for European capitals

February 22, 2013, 11:46 PM UTC

FORTUNE — The European Commission (EC) published its winter projections Friday. They point to further economic contraction and worsening debt dynamics this year giving way to recovery and financial stabilization in 2014 (and presumably beyond). But will they?

Let us start with the official numbers, focusing on five items:

  • After contracting in real terms by 0.6% in 2012, the GDP of the 17-member eurozone is projected to decline by another 0.3% in 2013. Accordingly, and despite forecasting an improving budgetary outlook, the debt burden would maintain its upward trajectory, rising by another 2 percentage points of GDP. Meanwhile, the alarming unemployment situation would worsen, with the overall rate increasing from 11.4% to 12.2%.
  • These disappointing projections are not limited to the struggling peripheral economies. The largest economies at the core of the eurozone are expected to expand marginally (Germany at 0.5%) or stagnate (France). And with this, joblessness in the core would edge higher.
  • Italy and Spain, viewed correctly by many as central to the stability of the eurozone, would contract by 1.0% and 1.4%, respectively. This would push unemployment up to 11.6% in Italy and to a stunning 26.9% in Spain.
  • Intra-eurozone dispersion would remain significant. With a projected 3% growth rate, Estonia would again lead the pack while Greece, expected to contract by another 4.4% would come last once more.
  • Finally, the EC forecasts a notable recovery in 2014, though this does not incorporate likely changes in the fiscal policy stance.  Specifically, every eurozone country (except Cyprus) is projected to grow, with the area’s growth rate coming in at 1.4% —  encouraging, though not enough to dramatically change the unemployment picture.

If these projections are to be believed, they point to greater socio-political fragility in 2013. Specifically, the wave of popular dissatisfaction sweeping across Europe would persist. Street protests would remain a recurrent theme, especially in the peripheral economies. And traditional political structures would come under greater pressure, without a durable alternative emerging any time soon.

The longer such malaise persists, the greater the challenges facing the European Central Bank in its (so far successful) quest to maintain financial stability – reinforcing the view that the ECB can provide a bridge to a better destination but cannot, on its own, deliver this destination.

MORE: Are the French really that lazy?

All this should be ringing loud alarm bells in national capitals, as well as in the EC’s headquarters in Brussels and the ECB’s Frankfurt.

A renewed effort is needed to make progress on key regional initiatives (including supplementing monetary union with greater fiscal and banking union and closer political integration) and in ensuring a better macro-economic/structural policy mix in several individual countries.

This urgent call for action is amplified by what we feel are still overly optimistic EC projections. For example, PIMCO projects the eurozone could contract by 1 – 1.5% this year rather than the EC’s 0.6%.

It is essential that politicians take advantage of the current ECB bridge, acting now to provide citizens with greater hope of a significant turnaround. Absent that, policy challenges will mount, and the eurozone will face a growing number of disruptive feedback loops involving economic, financial, political and social factors.

It would be a great shame – indeed tragic – if European politicians were to wait for a deeper crisis in order to make use of the valuable opportunity afforded to them by the ECB.

Mohamed El-Erian is the CEO and co-chief investment officer of PIMCO. He also heads the U.S. global development council.