European Commission Slashes Eurozone Forecasts
Peter Spiegel in Brussels
Financial Times
The European Commission slashed its economic outlook for the eurozone on Tuesday, putting even more pressure on the European Central Bank to expand its arsenal of extraordinary measures aimed at arresting slowing growth and fending off deflation.
The Brussels forecast, which predicts the currency bloc growing only 1.1 per cent next year, down from a forecast of 1.7 per cent just six months ago, is one of the most serious indicators yet that the long hoped-for recovery from the continent’s debt crisis may be stalling.
The commission acknowledged the EU economy was not only “particularly weak” as compared with other developed countries, but was also underperforming compared with other post-crisis recoveries – and the slowdown risked feeding on itself. “The legacy of the crisis is affecting member states to different degrees but spillovers through trade and confidence are large,” it found.
The forecasts for Germany and France, the two largest eurozone economies, were among the sharpest revisions. The 2015 gross domestic product forecast for Germany, the common currency’s economic engine, was cut from 2 per cent in May to just 1.1 per cent; France went from 1.5 per cent to 0.7 per cent.
Commission officials insisted the troubling growth rates were not the fault of the EU’s austerity-led economic policies, noting that some of the countries that went through the toughest reform programmes are now growing strongly, albeit from low bases. Ireland, which emerged from its bailout last year, is expected to grow 3.6 per cent in 2015, the fastest in the EU; similarly Greece, a perpetual eurozone laggard, is forecast to expand 2.9 per cent.
“Fiscal consolidation is a necessity,” said Pierre Moscovici, the commission’s new economic chief.
“But the question which is in front of us is how to recreate hope in the European project.”
The struggles the eurozone faces to return to a sustainable growth path lie in stark contrast to the US, which for the second and third quarter was the fastest six months of growth in a decade, and the UK, which is one of the fastest-growing economies in the Group of Seven countries. The commission raised its forecast for the UK saying it expected the economy to expand 2.7 per cent next year.
Particularly troubling for the ECB, whose governing council is due to meet this week as fears grow about deflation, the commission sharply cut inflation projections, saying consumer prices would grow just 0.5 per cent this year and 0.8 per cent next year. The forecasts are even lower than the ECB’s own projections, made in September, which predicted 1.1 per cent inflation next year.
Jyrki Katainen, EU commissioner in charge of growth and jobs, insisted the drop was caused by lower energy and food prices rather than in “core” goods. “The risk of outright deflation in a sense of broad-based self-perpetuating falling prices across the euro area still appears very low,” he said.
The forecasts could prove problematic for France. Paris is in a tussle with Brussels over its 2015 budget, and the latest forecasts will be used by the commission to evaluate whether the government of François Hollande, president, has violated EU budget rules by failing to cut its deficit quickly enough. A decision is due by the middle of the month.
In its budget submission to Brussels three weeks ago, Paris said it would not get its deficit below 3 per cent of GDP by next year as originally required, and would instead reach 4.3 per cent. But those projections were based on French economic assumptions that projected its economy would grow 1 per cent next year, not the 0.7 per cent now predicted.
The commission said it was forecasting a 4.5 per cent deficit for France next year, though that does not include some of the recent economic reforms announced by Paris. Still, Mr Hollande is likely to come under renewed pressure in Brussels to pull forward those plans.
Peter Spiegel in Brussels
Financial Times
The European Commission slashed its economic outlook for the eurozone on Tuesday, putting even more pressure on the European Central Bank to expand its arsenal of extraordinary measures aimed at arresting slowing growth and fending off deflation.
The Brussels forecast, which predicts the currency bloc growing only 1.1 per cent next year, down from a forecast of 1.7 per cent just six months ago, is one of the most serious indicators yet that the long hoped-for recovery from the continent’s debt crisis may be stalling.
The commission acknowledged the EU economy was not only “particularly weak” as compared with other developed countries, but was also underperforming compared with other post-crisis recoveries – and the slowdown risked feeding on itself. “The legacy of the crisis is affecting member states to different degrees but spillovers through trade and confidence are large,” it found.
The forecasts for Germany and France, the two largest eurozone economies, were among the sharpest revisions. The 2015 gross domestic product forecast for Germany, the common currency’s economic engine, was cut from 2 per cent in May to just 1.1 per cent; France went from 1.5 per cent to 0.7 per cent.
Commission officials insisted the troubling growth rates were not the fault of the EU’s austerity-led economic policies, noting that some of the countries that went through the toughest reform programmes are now growing strongly, albeit from low bases. Ireland, which emerged from its bailout last year, is expected to grow 3.6 per cent in 2015, the fastest in the EU; similarly Greece, a perpetual eurozone laggard, is forecast to expand 2.9 per cent.
“Fiscal consolidation is a necessity,” said Pierre Moscovici, the commission’s new economic chief.
“But the question which is in front of us is how to recreate hope in the European project.”
The struggles the eurozone faces to return to a sustainable growth path lie in stark contrast to the US, which for the second and third quarter was the fastest six months of growth in a decade, and the UK, which is one of the fastest-growing economies in the Group of Seven countries. The commission raised its forecast for the UK saying it expected the economy to expand 2.7 per cent next year.
Particularly troubling for the ECB, whose governing council is due to meet this week as fears grow about deflation, the commission sharply cut inflation projections, saying consumer prices would grow just 0.5 per cent this year and 0.8 per cent next year. The forecasts are even lower than the ECB’s own projections, made in September, which predicted 1.1 per cent inflation next year.
Jyrki Katainen, EU commissioner in charge of growth and jobs, insisted the drop was caused by lower energy and food prices rather than in “core” goods. “The risk of outright deflation in a sense of broad-based self-perpetuating falling prices across the euro area still appears very low,” he said.
The forecasts could prove problematic for France. Paris is in a tussle with Brussels over its 2015 budget, and the latest forecasts will be used by the commission to evaluate whether the government of François Hollande, president, has violated EU budget rules by failing to cut its deficit quickly enough. A decision is due by the middle of the month.
In its budget submission to Brussels three weeks ago, Paris said it would not get its deficit below 3 per cent of GDP by next year as originally required, and would instead reach 4.3 per cent. But those projections were based on French economic assumptions that projected its economy would grow 1 per cent next year, not the 0.7 per cent now predicted.
The commission said it was forecasting a 4.5 per cent deficit for France next year, though that does not include some of the recent economic reforms announced by Paris. Still, Mr Hollande is likely to come under renewed pressure in Brussels to pull forward those plans.
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