Debt relief for Greece on table as EU economic growth picks up

Siim Kallas. European Commission 2014. [EC]

New debt relief measures for Greece will be discussed Monday (5 May) by euro area finance ministers, the European Commission confirmed as it presented a spring economic forecast showing gradual growth across the EU.

Signs of economic recovery are strengthening in Greece, which is expected to return to growth in 2014.  Euro zone governments hold more than 80% of Greece’s €319 billion public debt.  The euro group meets tonight ahead of tomorrow’s meeting of all EU finance ministers in Brussels.

Commission Vice-President Siim Kallas said there was “quite the possibility” debt reduction would be raised at both meetings.

Kallas said: “I think that debt reduction is a very big, big question and we must discuss this with creditors […] I don’t think there is much room to manoeuvre but of course this will be discussed with member states.”

In April, European officials confirmed that Greece will obtain more debt relief from its international lenders after meeting fiscal targets and achieving a budget surplus (read here). The surplus of €1.5 billion is the first since 2002 and came a year ahead of schedule. Greece also returned to the bond market, ending a four-year exile from financial markets.

Kallas also welcomed Portugal’s decision Sunday to opt for a “clean exit” from its three year €78 billion bailout. The Portuguese government announced Sunday it would not take a precautionary credit line as a safety net against future financial turmoil. 

It means the country, the second euro area country after Ireland to exit, will no longer have to answer to foreign creditors after the bailout ends on 17 May. Lisbon was forced to seek the bailout from the European Union and IMF in 2011.

“Personally I am very much supportive to the Portuguese government’s decision.  It’s politically very important, it creates a better sentiment, and it creates investor confidence,” he said.

Kallas said the EU’s economic recovery has now taken hold.  “Deficits have declined, investment is rebounding and importantly, the employment situation has started improving,” he said.

The euro zone economic recovery, strongly export-driven with gradually firming domestic demand, should produce 1.2% growth this year after a 0.4% fall in 2013, the commission said.

Growth is to accelerate to 1.7% next year as domestic demand picks up, marginally slower than the 1.8% the commission forecast for 2015 in February.

“Domestic demand is expected to become the key driver of growth over the forecast horizon. Consumer spending should progressively add to growth as real income benefits from lower inflation and the stabilising labour market,” the commission said.

The risk of deflation in the euro zone is very low, the European Commission said but price growth will pick up more slowly than expected this year and next, partly because of a stronger euro and a weak recovery.

Annual consumer inflation  €9.5 trillion economy is to slow to 0.8% this year from 1.3 % in 2013, staying well below the European Central Bank’s target of close to, but below 2% even in 2015 with 1.2 %.

The new projection is lower than the February forecast when it saw inflation at 1.0 % this year and 1.3% next year.

Consumer prices in the 18 countries sharing the euro are rising at only a very moderate pace because of record-high unemployment, government spending cuts and tight credit, as banks remain reluctant to lend to businesses.

“Inflation could turn out lower than envisaged in the central scenario if labour market conditions and commodity prices turn out weaker than expected,” the commission’s forecast said.

“However, the probability of outright deflation, defined as a generalized and self-enforcing fall in prices in the euro area as a whole, remains very low,” it added.

Economists polled by Reuters expected no change in the ECB’s monetary policy after the central bank meets on rates this Thursday. Roughly half of them expected some form of stimulus in the future, be it a rate cut or outright buying of assets.

Because inflation is so far below its target, the ECB has opened the door to money printing via the so-called “quantitative easing” (QE) to support the economy, which is growing at a slower rate than much of the rest of the world.

Inflationary pressures in the euro zone have increased marginally but remain subdued, it said.

In a separate data release, the EU’s statistics office Eurostat said that producer prices, a proxy for consumer inflation, fell as expected 0.2% on the month in March, putting the annual producer price inflation reading at -1.6%.

Veronica Nilsson, Confederal Secretary of the European Trade Union Confederation, said: ” “There may be signs of recovery, but the European economy is far from healthy. Today’s forecasts show no significant fall in unemployment. With 26 million unemployed, and unemployment rates forecast to go from 10.5% this year to 10.1% next – it is hard to see in what sense there is real recovery. 

“The levels of unemployment, poverty and inequality in the European Union today are a disgrace and should be worrying the European Commission far more than they seem to.” 

The European Commission's spring forecast points to continuing economic recovery in the European Union following its emergence from recession one year ago. The gradual pick-up in economic growth was announced the day after Portugal, which was bailed out in 2011, announced it would exit the bailout plan. Greece has shown some signs of recovery. Ireland has already left its bailout program. 

  • 5 May: Meeting of euro area finance ministers in Brussels.
  • 6 May: Meeting of all EU national finance ministers in Brussels.
  • 17 May: Portugal exits bailout.

European Commission

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