Brussels, 01/03/2011 (Agence Europe) - In 2011, growth and inflation are expected to grow faster than forecast, according to the interim economic forecasts published by the European Commission on 1st March 2011. Growth is expected to reach 1.8% in the EU27 and 1.6% in the eurozone, 1% higher than predicted in November 2010 (see EUROPE 10266). As a result of the hike in fuel and commodity prices, it is forecast that inflation will reach 2.5% in the EU27 and 2.2% in the eurozone, 0.4% higher than forecast in the autumn.
In a recent speech, EU Economic and Monetary Affairs Commissioner Olli Rehn hammered home three points - after a predicted slowdown in Q210, economic recovery will pick up this year; - a rebalancing of the economy is taking place in terms of domestic demand in Germany but growth varies from one member state to the next; - due to rising energy and commodity prices (the Commission predicts that oil will be above US$ 100 a barrel), temporary inflation is rising although underlying inflation is under control and will rise slowly in 2011.
To justify the increased growth forecasts for Europe, the Commissioner said that indicators like household prices and business confidence, along with stabilisation of the financial markets were at play, although the recovery remained fragile. The differences in the cost of spreads for sovereign debt have diminished but remain abnormally high, particularly for countries like Ireland and Portugal.
The increase in the growth forecasts at regional level hides massive differences in the seven countries for which information has been published. With growth of 2.4%, Germany will drive the eurozone, explained Rehn. The Commission says that the trend of domestic consumption driving economic growth is being seen in Germany and is a good thing for that country and the rest of Europe. Next come France and the Netherlands, both at 1.7%, and Italy and Spain, both at 1.1%. Refusing to comment on the differences between his own department's forecasts and the forecasts made by the Spanish government, Rehn said he backed Spain's substantial efforts to ensure budget consolidation and restructure its banks. He said Portugal's target of reducing its public deficit to 4.6% in 2011 was realistic. Ireland's new prime minister wants to renegotiate the terms of the economic adjustment programme negotiated last year in return for international financial aid and the commissioner said that the question of the interest rate for Ireland's loans should be settled as part of an overall deal on changing the clout and powers of the EFSF fund (see EUROPE 10325), but that the option of making private investors pay for banks' losses was non-negotiable.
The Commission has updated is growth forecasts for two non-eurozone countries, Poland and the United Kingdom, which are expected to see growth of 4.1% and 2% respectively. The only country whose growth forecast has been reduced is the United Kingdom. Rehn expects the Polish government to officially confirm in the near future that it will be taking measures to reduce its deficit to below the 3% cut-off point in 2012 (see EUROPE 10317). Hungary is expected to do the same.
Competitiveness pact. The main aims of the competitiveness pact that the EU is likely to endorse in March are compatible with those recommended by the European Commission in its Annual Growth Review (speedier budget consolidation, greater productivity and sorting out the banks), said the commissioner. He said that although the idea had come from two eurozone countries, it should be open to all member states and be compatible with the single market. In order to be credible, he said it should form part of the EU's new economic governance system that includes surveillance and sanctions.
Asked whether the idea of scrapping the inflation-linking of pay increases had been set aside, Rehn said that suitable mechanisms were needed to ensure pay rises matched productivity. In most member states, inflation-linking had led to higher inflation and damaged economic efficiency, he said, but admitted that pay is not one of the main problems when it comes to low competitiveness. He praised Belgium's inflation-linking system as intelligent and nuanced but said that other countries had outdated systems. He urged Italy to demonstrate pay restraint. (M.B./transl.fl)