“The overall economic situation remains fragile” and “in some countries the recovery is yet to be felt,” the Brussels-based commission said in its 2011 Report on Public Finances today. “The years of the crisis left behind a legacy, not just of support measures that need to be reversed, but of lasting weaknesses to the public finances.”

European governments are struggling to lower their budget deficits and restore investor confidence in their ability to contain a crisis that sparked bailouts of Greece, Ireland and Portugal. In the 17-member euro region, the economy expanded at the weakest pace in the second quarter since emerging from a 2009 recession, partly as governments cut spending.

The commission sees average euro-region state debt rising to 88.7 percent of gross domestic product in 2012 from 87.9 percent this year, today’s report showed. Greece’s debt burden may swell to 166.1 percent of GDP from 157.7 percent, making it the highest in the region. Italy may have the second-highest debt level in 2012, it said.

‘More Cautious’

The euro dropped to its lowest level since 2001 against the yen today and depreciated versus the dollar on speculation that German Chancellor Angela Merkel is preparing for a Greek default. Merkel is due to hold talks on the debt crisis with European Commission President Jose Barroso today.

“The optimism of the spring that the European economy is emerging into the post-crisis world has become more cautious,” Marco Buti, head of the commission’s economics division, said in an e-mailed statement. “This optimism is moreover further muted by the risks associated with the member states with high spreads on their bond yields, as concerns about solvency” persist.

The Greek Cabinet voted yesterday to cut one month’s wages from elected officials and impose an annual charge on all property for two years, Finance Minister Evangelos Venizelos said. The measures will help the country meet deficit targets of 17.1 billion euros ($23.3 billion) this year and 14.9 billion euros in 2012.

The commission said that details in countries’ Stability and Convergence Programs “are encouraging,” with governments planning to “introduce necessary changes in the near future rather than postponing them with uncertain results.”

“The need for consolidation shouldn’t be underestimated,” the commission said. “There is always the risk that extra measures won’t be introduced as it’s clear that consolidation measures tend to have a political cost.”

While the economic recovery is “under way, the fiscal repair process” and its costs will “last for years to come,” the commission said.