Brussels, 10/11/2011 (Agence Europe) - As if the sovereign debt crisis were not bad enough, the slowdown in the EU economy may result in fully-fledged economic recession in 2012, which would dampen confidence and make it harder for Europe to attract investors. EU Economic and Monetary Affairs Commissioner Olli Rehn said: “Growth has stalled in Europe, and there is a risk of a new recession. While jobs are increasing in some member states, no real improvement is forecast in the unemployment situation in the EU as a whole. The key for the resumption of growth and job creation is restoring confidence in fiscal sustainability and in the financial system and speeding up reforms to enhance Europe's growth potential.” The Commission has therefore revised down its growth forecasts and says that for the EU27, GDP will grow by 1.6% in 2011, and 0.6% in 2012. For the eurozone, a similar development is expected with growth of 1.5% in 2011 and 0.5% in 2012. Of the eurozone nations, only Estonia, Finland and Malta will see sturdy growth (3.2%, 1.4% and 1.3% respectively), the others hovering between 0% and 1.1%. The two biggest eurozone economies, France and Germany, will see growth of 0.6% and 0.8% respectively, while Italy's economy is expected to grow by 0.1%. Two of the eurozone countries in receipt of aid packages will see their economies shrink next year, Portugal by 3% and Greece by 2.8%, but Ireland will see positive economic growth of 1.1%.
Energy prices have been the main driver of inflation in 2011. As they are projected to gradually decrease, headline inflation is expected to fall back below 2% in 2012. Unemployment is expected to be at a standstill next year, averaging 10% in the EU and the eurozone but this varies enormously from country to country (20.9% in Spain, 18.4% in Greece, 14.3% in Ireland, compared with 4.5% in Austria, 4.7% in the Netherlands and 5.9% in Germany). The risks to the economic outlook are strongly tilted to the downside. In view of the frail GDP growth expected under the baseline scenario, there is considerable risk of recession with the main downside risks stemming from sovereign debt worries, the financial industry and world trade. Slower growth affects the sovereign debtors, whose weakness weighs on the health of the financial industry and is likely to counteract investor confidence in Europe and hold back global growth.
Public deficits. This year was a year for stabilising public finance and 2012 will be the year of consolidation through further public spending cuts and increased revenue, explained Rehn. The EU public deficit will reach 4.7% in 2011 and 3.9% in 2012. In the eurozone, it will be 4.1% in 2011 - slightly better than the Spring Forecast - and 3.4% in 2012. The Commission is calling on the countries that might fail to meet their target of returning to below the 3% of GDP cut-off point in 2012 for their public deficits to come up with additional austerity measures and submit them to the Commission by the middle of December. The commissioner said this was the case of Belgium, Cyprus, Hungary, Malta and Poland. In the spring of next year, attention will focus on other member states against which excess deficit proceedings have been initiated and which are failing to meet their public deficit targets.
In 2012, three eurozone countries, Belgium, Luxembourg and Malta, will see their public deficit rise higher than in 2011. Five member states will have a public deficit that meets the 3% rule this year, namely Germany (1.3%), Estonia (a 0.8% surplus), Luxembourg (0.6%), Finland (1%) and Malta (3%). Budget consolidation (spending cuts) will continue in the countries in receipt of international aid. From this year to next, Ireland's deficit is expected to fall from 10.3% of GDP to 8.6%, Greece's from 8.9% to 7% and Portugal's from 5.8% to 4.5%. Outside the eurozone, the United Kingdom's deficit will fall from 9.4% to 7.8%.
Public debt. The level of public debt is not expected to fall in 2012 in either the EU27 or the eurozone. The aggregate debt-to-GDP ratio is expected to peak in the EU27 at about 85 % in 2012 (compared with 82.5% in 2011), and to stabilise in 2013. In the eurozone, the debt ratio is projected to continue to increase slightly in 2012 to 90.4 % in 2012 (compared with 88% in 2011), but this varies widely from country to country. Greece's debt will increase from 162.8% of GDP in 2011 to 198.3% in 2012 (partly due to the shrinking economy), while Italy, which has the biggest absolute debt in the EU27 (€1.9 trillion), will see it stabilise at around 120% of GDP. Ireland's debt is expected to rise as a percentage of GDP from 108.1% in 2011 to 117.5% in 2012, and Portugal's from 101.6% to 111% in 2012. Over the same period, Germany's debt will fall slightly from 81.7% to 81.2%. In 2012, five eurozone countries will achieve the target of public debt of no more than 60% of GDP, namely Estonia (6%), Luxembourg (20.2%), Slovakia (51.8%), Slovenia (50.1%) and Finland (1.8%).
Italy. Quizzed about Italy's economy at a time when it is undergoing a severe political crisis and has seen its bond yields shoot up to new highs (see EUROPE 10492), Rehn stressed the positive and negative aspects of the cuts that have been announced to achieve the budget targets (returning to a balanced budget in 2013) and stimulate growth. He praised the moves to make it easier to hire and fire and relax the rules governing a number of professions, but said that the government had not said anything about the need to transfer some of the tax on labour to consumption, adding that it was not moving fast enough on competition and could do more when it comes to reforming the pension system.
Will Italy request aid from the EFSF bailout fund? Rehn said the first thing to be done was to restore political stability and make it possible to make decisions to take a firm, determined move to meet budget objectives and stimulate growth. He said that the average maturity of Italy's debt was seven years, which limited the impact on the budget in the immediate term of the rising interest rates. A 1% cut in the interest rates for Italian bonds corresponded to a rise in public spending of 0.2% of GDP in 2012 and 0.4% in 2013, he said. The current increase in the cost of servicing the debt, however, was having an impact on the cost of funding the Italian financial industry, which would have a fallout effect on the real economy. This was hurting the economy, which the Commission expects to stagnate in 2012 (with GDP growing by 0.1%).
France. The Commission has cut its growth forecasts for France next year by 2% to 0.6%. Commissioner Olli Rehn welcomed the recent austerity measures announced after the French government revised down its own growth forecasts. Paris is not expecting growth to rise above 1% next year. The French economy and budget ministers responded immediately saying they were fully determined to meet the commitment of bringing the public deficit back below the 3% cut-off point in 2013 and restoring a balanced budget in 2016. They said the new measures to speed up pension reform and scrap social and tax loopholes would save €65 billion by 2016, in addition to the cuts announced in 2007 that will make €51 billion-worth of savings in 2011-2012. The French budget for 2012 and 2013 will set aside cash to deal with lower-than-expected economic growth.
Germany. In Germany, all lights are on green. Although the German economy will see growth fall from 2.4% to 1.7% of GDP, its public deficit will fall to 1.3% in 2011 and 1% in 2012. Germany is the only EU member state that will be able to cut its public debt next year, although it will remain above 80% of GDP. The country has even discovered an additional €55 billion of income that has not yet been entered in the public accounts. Should Germany do more to boost growth in the EU by boosting domestic demand? Olli Rehn said the economic stabilisers are already at work in Germany (letting the deficit increase in periods of slow growth). He said that the country's tax cuts (estimated at €6 billion in 2012) will help boost spending among German households, describing the cuts as compatible with the G20 recommendations for countries with current account surpluses. (MB/transl.fl)