Growth, which has been positive at Eurozone level for three years, will be positive in 2017 in all countries of the Eurozone – the first time since the financial crisis, according to the winter economic forecasts presented by the European Commission on Monday 13 February.
Given uncertainty externally, such as the economic decisions to be made by the Trump administration, and internally, including the political risks related to an election year in several EU countries (the Netherlands, Bulgaria, France, Germany and possibly Italy), the European institution recommends sticking to the course of reforms and boosting investment.
The Commissioner for the Euro, Valdis Dombrovskis, announced that recovery is continuing in Europe for the fifth year in a row, stressing the importance of maintaining a constant reform effort and ensuring that the fruits of growth are distributed fairly. According to the Commissioner for Economic and Financial Affairs, Pierre Moscovici, growth will have beneficial effects on employment, with the unemployment rate set to drop to 9.6% of the active population in the Eurozone in 2017 (9.1% in 2018). He also announced that private consumption was the driving force behind this growth, as investment has not really taken off again yet.
Compared to its autumn economic forecasts from 2016 (see EUROPE 11664), the Commission has slightly revised its growth forecasts upwards. It now anticipates that GDP will rise by 1.6% in 2017 and by 1.8% in 2018 in the Eurozone, and by 1.8% in both 2017 and 2018 for the EU as a whole.
The differences between member states remain considerable. Growth is expected to be highest in Romania (+4.4% of GDP), Luxembourg (+4.0%) and Malta (+3.7%). It will be healthy in Greece (+2.7%) and Spain (+2.3%), good in Germany, Austria and Portugal (1.6%), moderate in the United Kingdom (+ 1.5%) and France (+1.4%) and sluggish in Italy (+0.9%).
As regards government finances, the aggregated deficit and debt ratio will continue to drop. In the Eurozone, the aggregated deficit will fall from 1.7% to 1.4% of GDP between 2016 and 2017, and from 1.9% to 1.7% of GDP at EU level over the same period.
Here again, differences between member states persist. In the Eurozone, Spain is expected to be the only country to exceed 3.0% of GDP by the end of the year, at 3.5% of GDP following a level of 4.7% in 2016. France is expected narrowly to succeed in bringing its deficit down to 2.9% (3.3% in 2016), a vital condition for it to come out of excessive deficit procedure. Italian, Greek and Finnish deficits are expected to remain stable at 2.4%, 2.3% and 1.1% respectively. Four countries are expected to record a budgetary surplus next year: Germany (+0.4%), Luxembourg, the Netherlands (+0.2% each) and the Czech Republic (+0.1%). It is worth noting that the improvement in the government deficit will be considerable in Belgium, from -2.9% in 2016 to -2.2% of GDP in 2017, Slovakia (from -2.2% to -1.4%) and the United Kingdom (from -3.4% to -2.8%).
As regards government debt, the national differences will be even more marked, although the overall trend is downwards. In 2017, the Greek debt will still be highest in the EU in relation to GDP, but it is expected to start to fall, from 179.7% to 177.2%. It is followed by Italy (133.3%), Portugal (128.9%) and Cyprus (103.2%). It is worth noting that the Spanish debt may rise to reach a level of 100% of GDP next year. While the French government debt is expected to rise from 96.4% to 96.7% of GDP, the German debt will do the reverse, falling from 62.2% to 65.5% of GDP.
Furthermore, having registered very low levels over the last two years, inflation is now expected to start to climb, from 0.2% in 2016 to 1.7% in 2017 and 1.7% in 2018.
Italy. When asked about the possibility of opening an infringement procedure against Italy over its failure to respect the debt criterion (see EUROPE 11713), Moscovici said that the recent letter from the Italian authorities contained measures that were not detailed enough to allow their impact to be included in the economic forecasts. Italy has pledged that it will adopt measures by the end of April that are equivalent to 0.2% of GDP (a third in savings, two thirds in additional collections). This promise may be all the harder to keep if general elections are called in 2017, with the Democratic Party in power having met on Monday to discuss this possibility.
France. Moscovici said that the Commission was keeping its deficit forecasts for France (-2.9%) unchanged, but a touch higher than those of the French government. The message is a very simple one: for France to regain its budgetary credibility over the longer term, it will have to continue its budgetary consolidation efforts, he said, dismissing as "absurd" the ideas of the National Front calling for the country to leave the Eurozone, and possibly even the EU, altogether.
Uncertainty in the USA. The American presidential elections have done much to increase the uncertainty over the future direction of US internal and foreign policy, the Commission explains in its winter economic forecasts. President Trump has only been in the White House for 23 days, yet things are moving quickly and decisively, Moscovici notes. Although the Commissioner would like to find out about American intentions on financial regulations, there seems to be little doubt as to the protectionist approach (anti-immigration decree and withdrawal of the transpacific trade agreement) of the new American administration. As the Commission's document points out, Donald Trump made a fair few promises during his election campaign: budgetary cuts, deregulation, etc.
In the US, the budgetary stimulus is likely to favour short-term growth, but adopting a protectionist stance is likely to slow down medium-term prospects. This, furthermore, is the main risk to the American economy, according to the Commission, even though it predicts US growth of 2.3% of GDP this year and 2.2% next. (Original version in French by Mathieu Bion with Élodie Lamer)