Brussels, 04/11/2014 (Agence Europe) - On Tuesday 4 November, the European Commission scaled back its growth forecasts for the Eurozone and the EU in 2014 and 2015, compared to its spring forecasts.
Whereas in May, it predicted growth of 1.2% of GDP in 2014 and 1.7% in 2015 in the eurozone, the European institution now predicts that the increase in GDP will be 0.8% and 1.1% this year and next respectively (EUROPE 11072). At EU level, GDP will not grow by 1.6% in 2014 and 2% in 2015, but by 1.3% and 1.5% respectively. The figures published on Tuesday are based on the new SEC2010 standard developed by the Statistical Office of the EU (Eurostat).
“Nobody knows” whether these forecasts will prove to be correct, said the Commissioner for Growth and Investments, Jyrki Katainen, when asked why the Commission had decided to revise the published figures, in most cases downwards. This less impressive performance can be explained, he said, by ongoing public and private indebtedness and an “uncertain” reform agenda in various countries. The Commissioner for Economic and Financial Affairs, Pierre Moscovici, explained that “low levels of investment are a major cause of this flat-line growth”, a reason which is “not unique to the vulnerable countries”.
Against an economic backdrop characterised by flat-line growth and very low inflation, not all of the EU countries are reacting in the same way. Ireland is the country which will experience the highest levels of growth this year (+4.6% of GDP). With GDP set to rise by 1.2%, Spain will do better than anticipated. In 2014, growth in Germany will be lower than previously announced (1.3%) and will stagnate in France (0.3%) at its 2013 level. A few member states will be in recession: Cyprus (-2.8%), Italy and Finland (-0.4% each). Outside the eurozone, growth will be strong in the United Kingdom (3.1%) and Poland (3%), but Croatia will experience recession (-0.7%).
The aim of the exercise was not to provide an assessment of the draft 2015 budgets of the member states, following the recent stand-off between the countries of the Eurozone, such as Italy and France, and the Commission (EUROPE 11186). The date is therefore set with all of the member states for the end of November. In the meantime, “constructive and demanding” dialogue will be sought, Moscovici pledged.
In order to kick-start growth, the two Commissioners believe that there is no one-size-fits-all response applicable to all of the member states. Like the previous 'Barroso' Commission, the 'Juncker' Commission is preaching a political mix of “credible” policies and structural reforms to give a shot in the arm to economic activity and growth-driving investments.
Focusing as they do on the structural budgetary effort, the rules of the Stability and Growth Pact are “relatively flexible” to take account of the specifics of each country, said Katainen. By no means playing down the needs for the “stabilisation” efforts the member states made during the sovereign debt crisis, Moscovici said that excessive levels of indebtedness were limiting the budget earmarked to pay for public services. Without growth, however, there is no way out of indebtedness, he observed. He also stressed the importance of opening up a new chapter, that of the “stimulation” of the European economy, in order to “bring hope back to Europe”. Referring to the investment plan of €300 billion to be presented by the Commission before Christmas, he said that it will require “as much private investment as possible and as much public investment as necessary”. This investment plan is not going to change the world, but it comes as part of an overarching policy designed to breathe new life into the European economy, which is short of both supply and demand, according to Katainen.
The Commission predicts that the average deficit of the Eurozone and of the EU will tail off slightly between 2013 and 2014, from 2.9% of GDP to 2.6% and from 3.2% to 3% respectively. Over this period, 14 member states will nonetheless see their deficit rise: - Eurozone: Belgium (from 2.9% to 3%), France (4.1%, 4.4%), Italy (2.8%, 3.0%), Latvia (0.9%, 1.1%), the Netherlands (2.3%, 2.5%), Austria (1.5%, 2.9%), Slovakia (2.6%, 3%), Finland (2.4%, 2.9%); - non-Eurozone: Bulgaria (1.2%, 3.6%), Czech Republic (1.3%, 1.4%), Denmark (0.7%, 1%) Croatia (5.2%, 5.6%), Hungary (2.4%, 2.9%), Sweden (1.3%, 2.4%). Only two countries are in a situation of budgetary surplus: Germany and Luxembourg (0.2% each).
The fact that the public indebtedness peak will be delayed from 2014 to 2015 is one of the consequences of the moribund economic situation. At eurozone level, the average debt will continue to rise: 93.1% of GDP in 2013, 94.5% in 2014 and 94.8% in 2015. The same will apply to the EU as a whole: 87.1% in 2013, 88.1% in 2014, 88.3% in 2015. Here again, the national situations remain highly contrasted. Debt will be higher than GDP in Greece (175.5%), Italy (132.2%), Portugal (127.7%), Ireland (110.5%), Cyprus (107.5%) and Belgium (105.8%). Dropping from 123.3% of GDP to 110.5%, debt will fall sharply in Ireland, which will pay off its debt to the IMF in full. The situation is similar in Germany, where debt will fall from 76.9% of GDP to 74.5%, and in Poland (55.7%, 49.1%). The debt/GDP ratio will be lowest in Estonia (9.9%) and Luxembourg (23.0%).
(Former) financial bailout countries. Katainen, who is often described as a 'budgetary hawk', did not escape questions about the poor performance of the country of which he was recently Prime Minister. In recession (GDP falling by 0.4% in 2014), Finland is a long way behind Ireland, which has turned out the healthiest growth forecasts in the EU for the last three years (+4.6% in 2014, +3.6% in 2015, +3.7% in 2016).
In the Commission's view, the recurring questions are these: do we need, in the future, austerity or growth? Was budget consolidation a complete mistake? He observed that in the Eurozone, budgetary policies are now “by and large neutral”, as the average deficit has fallen to 2.6% of GDP. He argued against the view that Europe is nothing but austerity: “who would have lent money for the countries who were in the biggest risks if they hadn't committed to reduce deficit and debt?”. Nobody but the citizens of the other countries of the eurozone. He referred to Ireland as an example: “for Ireland, the medicine was bad-tasting, many people lost their jobs, but Ireland is coming back: by doing what was necessary it has regained its confidence back”, bringing private investment in its wake.
Portugal and Ireland managed earlier this year to come out of their bailout plans without a safety net.
Despite a stabilisation of its situation, Greece is unlikely to do likewise (EUROPE 11189). “There is so little access to the financial markets” and this has virtually eclipsed any talk of its eligibility for a classic credit line from the European Stability Mechanism (ESM) when it comes out of its programme, a senior EU official had stated the day before. The Eurogroup is therefore taking position in favour of a credit line under enhanced conditions ('ECCL'), which are more intrusive and more binding than the classic precautionary conditioned credit line ('PCCL'). Without commenting on the substance of the discussions underway, Moscovici said that he hoped that an agreement on the programme exit could be reached at the Eurogroup meeting of 8 December, so as to “respect the integrity of the Eurozone”. Greece, which is seen as a 'champion' of reforms by the OECD, is struggling to get its way, partly due to the political instability which holds sway and the risk of early elections, according to analysts.
“Reforms are starting to bear fruit in Greece”, noted Katainen. His French counterpart went on to explain that Greek growth will be substantially below the European average next year. It is expected to stand at 2.9% of GDP in 2015, then 3.7% in 2016. All of the countries under an aid programme, with the exception of Cyprus, will get back to a situation of growth in 2014. Although it will experience recession this year (GDP falling by -2.8%), the small island in the Mediterranean will then see a return to growth (+0.4% in 2015, +1.6% in 2016). Having been somewhat sluggish in 2014 (+0.9%), Portuguese growth will take off in 2015 (+1.3%) and 2016 (+1.7%). “We need to keep in mind that faster growth in the programme countries has to be seen against the backdrop of large output losses during the crisis”, Moscovici explained. (MB and EL)