Brussels, 03/11/2008 (Agence Europe) - It comes as no surprise that the Commission's autumn economic forecasts for the European Union and the eurozone are bad for 2009. The financial crisis is at the core of the slowdown in economic activity at the international and European level and no economy is spared. The only positive note in a very black picture is the rapid fall in inflation that should last throughout 2009. Commissioner Joaquin Almunia, responsible for economic and monetary affairs, feels this situation requires a coordinated response from member states. He said: “We need coordinated action at European level, similar to what we have done in the financial sector”. Such action could be put on track at the Ecofin Council on Tuesday, although the French Presidency hopes debates will focus on preparing a European response to the financial crisis with a view to the G20 summit in Washington on 15 November.
“The horizon is gloomy: the financial crisis is not over. It has deepened and extended rapidly”. The result is that the European machine is at a standstill. According to the Commission, growth of the EU27's Gross Domestic Product (GDP) will be 1.4% on average in 2008 and 0.2% in 2009, a slight recovery beginning as of 2010 with growth evaluated at 1.1%. In the eurozone, forecasts are similar with growth forecast at 1.2% for 2008, 0.1% for 2009 and 0.9% for 2010. No European economy will have growth above 5% in 2009, although Slovakia and Romania should be close to this level. On the other hand, five member states (Spain, Estonia, Ireland, Latvia and the United Kingdom) should enter recession, in particular due to the turnaround in the real estate market and to national exposure to the financial crisis. In eight other countries (Germany, Belgium, Denmark, France, Italy, Lithuania, Portugal and Sweden), growth should be at zero or close to zero. The commissioner went on to acknowledge that economic decoupling, the time between the economic slowdown in the United States and the relative robustness of the emerging economies, “is not in our forecasts for Europe, for the emerging countries, or for anyone”.
Given such a situation, national public finance will worsen substantially, thus breaking off the general trend of budgetary consolidation noted in 2007. On average, public deficits compared to GDP should increase from 1.6% in 2008, to 2.3% in 2009 and to 2.6% in 2010 (1.3%, 1.8% and 2% in the eurozone over the same period). “Seven member states should find themselves above the 3% limit” of the stability and growth pact (SGP), Mr Almunia said. In addition to Hungary and the United Kingdom which are already both subject to excessive deficit procedure, France (deficit of 3.5% forecast in 2009), Ireland (6.8%), Latvia (3.6%), Lithuania (5.6%) and Romania (4.1%) could, unless policy changes, find themselves in trouble with the Commission - a situation due to the “economic stabilisers” whereby, when the economic situation is bad, tax revenue decreases and budgetary spending falls. Mr Almunia said that a procedure would be opened in “coming weeks” against Ireland, whose 2008 deficit may already be 5.5% - the same thing for France in 2009 if forecasts prove right. Strongly stressing the need to comply with the rules of the SGP, the commissioner pointed out that the revised pact in 2005 predicted a certain flexibility so that member states may face up to economic slowdown. But all member states are not in the same situation when it comes to economic slowdown. Germany, for example, has a margin of manoeuvre to support its economy, as its finances are in balance.
The only positive note in this grim picture is the rapid fall in inflation. Evaluated at 3.9% in 2008 in the EU (3.5% in the eurozone), the consumer price index is expected to fall considerably to reach 2.4% in 2009 (2.2% in the eurozone). This fall is mainly due to the fall in oil prices per barrel that the Commission puts at $104 in 2008, and around $85-90 in 2009 and 2010. As a result, the euro/dollar exchange rate should be “closer” to economic fundamentals, at $1.36 per euro over the next two years, Mr Almunia said. On the subject of the euro, he enthusiastically noted the “recent awareness” by some member states (Denmark, Sweden, Poland) of the “risks of not joining the eurozone” in this time of financial turbulence (see EUROPE 9772 and 9773).
Does the eurozone need an economic government? Urgent decision-making aimed at addressing the functioning of financial markets, surveying the implementation of measures adopted and the preparation of the European position for the Washington summit “demand coordination at the level of the EU27 and especially of the eurozone”, Mr Almunia said. He went on to add that this strengthened coordination between countries using the single currency should also promote “preservation of the advantages to be gained from being part of the eurozone”. (M.B./transl.jl)