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30/08/2016

Eurozone 2011 growth to slow amid spending cuts

Innovation & Industry

Eurozone 2011 growth to slow amid spending cuts

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The euro zone's economy will slow slightly next year as governments cut spending to win back financial market confidence. But private demand should give growth a fresh boost in 2012, the European Commission said on Monday (29 November).

In its twice-yearly economic forecasts for the 27-nation bloc, the European Union executive said growth in the single currency area would slow to 1.5% in 2011 from 1.7% seen this year, but rebound to 1.8% in 2012.

"With private domestic demand as a whole strengthening, the recovery is said to be increasingly self-sustaining over the forecast horizon," Economic and Monetary Affairs Commissioner Olli Rehn told a briefing.

The main engine of growth in the euro zone will be the biggest economy, Germany, where growth is likely to slow substantially next year from the 3.7% expansion seen in 2010, but still be a respectable 2.2%.

A weaker global economy will cut demand for eurozone exports, but many eurozone governments will also be slashing spending and raising taxes to return public finances to a sustainable path.

The aggregated eurozone budget deficit will shrink next year and in 2012, but debt will continue to rise, with that of Belgium and Ireland becoming larger than their annual output, the Commission said.

Concern over the ability of Ireland to service its huge debt, which was boosted by government support to the ailing banking sector, has forced Dublin to seek EU financial help and prompted concern Portugal and even Spain could be next.

The budget deficit of the countries using the euro will fall to 4.6% of gross domestic product next year from 6.3% expected this year and further to 3.9% in 2012.

Government debt is set to rise to 86.5% of GDP next year from 84.1% in 2010 and increase to 87.8% in 2012.

"A determined continuation of fiscal consolidation and frontloaded policies to enhance growth are essential to set a sound basis for sustainable growth and jobs," Rehn said.

"The turbulence in sovereign debt markets underlines the need for robust policy action."

Portugal and Spain targets

The market spotlight has now turned to Portugal, which has a large debt, but very slow growth and an uncompetitive economy.

Weighed down by heavy cuts in budget spending and higher taxes, Portugal will fall back into recession, contracting 1% in 2011, and return only to weak growth of 0.8% in 2012, the Commission forecast.

Lisbon plans to cut its budget deficit to 4.9% in 2011 from 7.3% this year, but its debt will rise to 88.8% of GDP in 2011 from 82.8% seen this year.

"In case the fiscal target would be missed because of somewhat lower growth materialising, then the government assumes that is essential still to meet the fiscal target if necessary by taking additional measures," Rehn said.

"And moreover, it is clear that it is essential that Portugal will develop and implement equally ambitious structural reforms to reach its growth potential," he added.

Ireland, which on Sunday agreed on an 85 billion euro rescue package from the EU and the International Monetary Fund, will see its economy grow 0.9% next year after a 0.2% contraction this year, but growth should accelerate to 1.9% in 2012, the Commission said.

Dublin will have the biggest budget gap in the EU of 32.3% this year, because of huge costs of supporting its ailing banking sector, but will reduce that shortfall to 10.3% next year and cut it further to 9.1% in 2012.

"The Irish economy is flexible and while there are serious challenges concerning public finances and especially the banking sector […] it has the capacity of rebounding rapidly from this recession. Export growth is already a fact," Rehn said.

Spain, also in the market spotlight because of its low growth and a potentially costly repair of its banking system, will contract 0.2% in 2010 but grow again 0.7% in 2011 and 1.7% in 2012, the Commission said.

Its deficit is to fall to 6.4% in 2011 from 9.3% in 2010 and to 5.5% in 2012 as Madrid's austerity measures kick in. Spain wants to cut its budget deficit to 6% next year, a target Rehn called challenging.

"The Spanish fiscal strategy […] is on track. If growth next year is lower than expected, it is necessary to take further measures to make sure that the fiscal target is met," he said.

While deficits decline, debts rise

The highest debt of all EU countries will be in Greece, where debt will balloon to 150.2% of GDP next year from 140.2% in 2010 and rise even further to 156% in 2012.

Belgium will see its debt rise from 98.6% of GDP this year to 100.5% in 2011 and to 102.1% in 2012.

Ireland's debt is also likely to grow to 107% of GDP next year from 97.4% expected in 2010, and to jump to 114.3% in 2012.

(EurActiv with Reuters.)

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Background

The European Commission publishes economic forecasts four times a year. The spring and autumn forecasts cover growth, inflation, employment, budget deficits and debts for all EU member states and several non-EU countries. The smaller interim forecasts – usually available in February and September – make predictions for the largest countries only.

The Commission's spring forecast predicted just 1% growth in 2010 and 1.7% in 2011. Spring predictions warned of weak domestic demand and a narrowing of unemployment levels to 10%.

This latest forecast comes after two eurozone countries, Greece and Ireland, applied for joint EU/IMF loans, with Portugal and Spain predicted to be close behind in seeking external assistance to plug budget gaps. 

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