Brussels, 05/05/2014 (Agence Europe) - The European Commission's Spring Economic Forecasts, published on Monday 5 May, expect growth in the eurozone to reach 1.2% of GDP in 2014 and 1.7% in 2015, and growth in the EU28 to reach 1.6% in 2014 and 2% in 2015.
European Commission Vice-President Siim Kallas said the EU member states' reforms were bearing fruit, investment was rising and the job situation starting to improve.
Kallas said he did not want to comment at this stage on the stability and reform programmes that the member states submitted in April, as the measures set out in the plans have not been included in the Spring Forecasts. On Monday 2 June, the European Commission will unveil country-specific recommendations under the European semester process and ahead of the European summit in June. Kallas simply urged the member states to continue with their structural reforms, which he said was the only way to become more competitive and regain the confidence of the money markets.
The commissioner was not particularly concerned about inflation which is expected to remain low until 2016 (0.8% in 2014 and 1.2% in 2015 in the eurozone and 1% in 2014 and 1.5% in 2015 in the EU28). He said a similar situation was at play elsewhere in the world and would not be an obstacle to the introduction of reform in Europe or carry a serious risk of deflation for that matter.
Once again, the Spring Economic Forecasts reveal great differences among the member states. In 2014, only Cyprus and Croatia are expected to remain in recession with GDP falling by 4.8% and 0.6% respectively. Growth is expected to be low in Finland (0.2%), Greece (0.6%), Italy (0.6%) and Slovenia (0.8%), which, incidentally, in November the European Commission was expecting to be in recession (see EUROPE 11026). Moderate growth is forecast for France (1%), Spain (1.1%), the Netherlands (1.2%) and Portugal (1.2%), with slightly stronger growth in Germany (1.8%), the Czech Republic (2%) and Malta (2.3%). Strong growth is expected in Luxembourg (2.6%), the United Kingdom (2.7%) and Sweden (2.8%). The highest growth is forecast for Latvia (3.8%).
Public deficits will continue to fall to an average of 2.5% in both the eurozone and the EU28 this year. There are wide differences among the member states in this domain. Poland will have a strong budget surplus (5.7% of GDP) and Germany is expected to be in equilibrium. Eurozone nations expected to have deficits of below 3% of GDP are Luxembourg (0.2%), Estonia (0.5%), Latvia (1%), Greece (1.6%), Finland (2.3%), Malta (2.5%), Belgium (2.6%) and Italy (2.6%), Austria (2.8%), the Netherlands (2.8%) and Slovakia (2.9%). Eurozone nations expected to have deficits of above 3% of GDP are France (3.9%), Portugal (4%), Ireland (4.8%), Spain (5.6%), and Cyprus (5.8%)
Public debt is expected to peak at 96% of GDP in the eurozone and 89.5% of GDP in the EU28, but then to fall slightly to 95.4% of GDP in the eurozone and 89.2% in the EU28 in 2015. The member states differ enormously in this domain. The highest debt in the eurozone is in Greece (177.2% of GDP), Italy (135.2%), Cyprus (122.2%), Ireland (121%) and Belgium (101.7%) and the lowest in Estonia (9.8%), Luxembourg (23.4%), Latvia (39.5%), Slovakia (56.3%) and Finland (59.9%).
Reacting to the forecasts for France, French Finance Minister Michel Sapin issued a press release that justified the differences in public deficit reduction in France, which the Commission says will fall to 3.9% in 2014 and 3.8% in 2015. Sapin said the European Commission had noted the French government's commitment to reduce the deficit to 3% of GDP in 2015, the fact that the forecast debt reduction was not reached is due to a number of well-identified elements, such as the slightly higher deficit in 2014, slightly lower growth in 2015 and, more importantly, the fact that priorities announced for 2015 have not been fully taken account of yet. He said the French government was determined to introduce a responsibility and solidarity pact and achieve the €50 billion of savings required to bring the deficit down below 3% in 2015 and for public spending to rise in line with inflation.
Slovenia came out of recession at the end of 2013, although the country's economy contracted over the course of last year by 1.1% of GDP. The recovery is expected to pick up in 2014 to 0.8% and in 2015 to 1.4%, driven by public investment, itself backed by the EU structural funds. Slovenia's public deficit widened enormously, from 4% in 2012 to 14.7% in 2013 due in part to the public bailout of the country's banks (which is estimated to have cost 10.3% of GDP).
Asked about the resignation that same day of Slovenian Prime Minister Alenka Bratusek, Kallas said that political instability was still a risk for implementation of economic policies. The country's deficit is expected to fall to 3.2% of GDP in 2014 and to 2.4% in 2015, but debt will continue to rise, reaching 81.3% of GDP in 2015.
Since the end of 2013, both Ireland and Spain have come out of their three-year aid programmes without the need for any further, precautionary, aid from the eurozone. Portugal will follow suit in May (see related article).
The question being asked now about Greece is what can be done to reduce the debt burden, which will reach 177.2% of GDP this year. The Commission is standing by a scenario whereby the country's debt starts to fall in 2015, when it is expected to reach 172.4% of GDP.
Eurozone nations promised to further reduce Greece's debt burden if it achieved a primary budget surplus, which it has now done. Euro Commissioner Olli Rehn (currently on leave to stand in the European elections) said in an interview in Vienna with this newsletter last week (see related article) that this was an important achievement.
Kallas said he did not think there was much room for manoeuvre when it came to reducing the Greek debt burden, a question that will be discussed by the Eurogroup on Monday evening.
Several options are on the table: - reducing the co-financing rates for EU structural funds (currently 5% for Greece); - cutting interest rates on the bilateral loans under the first bailout; - extending the maturity of loans from the current 30 years to 50 years. On the budget front, the European Commission is expecting Greece to continue its good track record, achieving a public deficit of 1.6% of GDP in 2014 and 1% in 2015. Unemployment currently stands at 27.3% of the working population, which is expected to being to fall this year (to 26%).
The Commission does not have up-to-date figures for Cyprus (the figures only go as far as February). The country's recession is expected to reach 4.8% of GDP in 2014, and recovery will be slight in 2015 (0.9%), while unemployment is expected to rise to 19% in 2014. The Commission points out that Cyprus has achieved a better-than-expected budget performance in 2013, but the public deficit will rise from 5.4% to 5.8% in 2014. In 2015, the job market is expected to pick up, which will boost state coffers, but spending will remain much the same, due to the ageing population. The public deficit will reach 6.1% in 2015, and debt will continue to rise (to 126.4% of GDP).
Will the tension in Ukraine affect the European economy? Kallas said that the tense situation along the EU's eastern border was one of the biggest external risks and the countries with strong economic ties to Russia, such as the Baltic States, Finland and Cyprus, may suffer from low growth and prolonged tension. Along with significant losses of Russian capital from Europe, the Commission warns that any new sanctions against Russia will rebound on economic activity. (MB and EL)