European Commission Vice-President Olli Rehn, responsible for economic and monetary affairs, told the European Parliament yesterday (25 February) that the EU economy was recovering overall, but warned of the risks of “protracted low growth” if structural reforms were not implemented.
Speaking before the MEPs in Strasbourg, Rehn presented the Commission's so-called 'winter forecast', one of the key steps in the 'European semester' for economic and monetary policy coordination in the 28-member-bloc (see background).
The forecast points to a moderate improvement of the EU's economic situation this year, after it emerged from its worst recession since the Second World War in spring 2013 and saw three consecutive quarters of subdued recovery.
Following real GDP growth of 1.5% in the EU and 1.2% in the euro area in 2014, activity is expected to accelerate in 2015 to 2.0% in the EU and 1.8% in the euro area.
These figures each represent an upward revision of 0.1 percentage points compared to the autumn 2013 forecast.
Rehn said the strengthening of domestic demand this year would help the EU to achieve more balanced and sustainable growth.
“The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest. To make the recovery stronger and create more jobs, we need to stay the course of economic reform," the Commission vice-president said, adding that the forecast was based on the assumption that the member states implement agreed reforms.
Unemployment remains high
Rehn said that the labour market was characterised by “slowly stabilising employment, with unemployment remaining high”. The outlook, he said, was for a modest rise in employment from this year onwards and a decline in unemployment to 10.4% in the EU and 11.7% in the euro area by 2015, with cross-country differences remaining very large.
Risks becoming more balanced
The Commission vice-president also conveyed the message that the reduction in general government deficits is set to continue. In 2014, headline fiscal deficits are projected to fall to 2.7% of GDP in the EU and 2.6% in the euro area, while debt-to-GDP ratios reach almost 90% in the EU and 96% in the euro area.
Risks are more balanced than they were in autumn, Rehn said. He explained that the largest risk to the growth outlook was a renewed loss of confidence that could stem from a stalling of reforms at national or European level. However, given the gradually strengthening recovery and the increase in confidence, there was only “a marginal probability” of such a development, he explained.
‘Vulnerable countries’ getting better
Activity has started to strengthen also in the “vulnerable countries”, and this trend is expected to continue, Rehn said. Ireland, Portugal, Greece and Cyprus have all benefitted from bailouts, Spain has received massive financial assistance for bank recapitalisation and Slovenia is struggling to avoid a bailout.
Only Cyprus and Slovenia are expected to register negative annual GDP growth rates in 2014 and by 2015, all EU economies are expected to be growing again. Internal and external adjustment in vulnerable member states is progressing, underpinned in many cases by significant structural reforms that are starting to bear fruit. Ireland has successfully completed its financial assistance programme in December 2013. Driven by strong exports, growth is significantly firming in Spain and Portugal, while a moderate rebound is expected in Greece.
‘Steady’ expansion in Germany, ‘timid’ growth in France
Among the bigger economies, a steady domestic demand-driven expansion is expected in Germany, while in France economic growth is only slowly recovering, supported by a timid pick up in private consumption. Mild economic recoveries in the Netherlands and in Italy are set to be driven by net exports and investment. The forecast foresees strong growth in the United Kingdom and in Poland on the back of increasingly robust domestic demand.
Risk of protracted low growth
The document stresses that risks to the growth outlook are linked to the stalling or partial implementation of structural, fiscal and institutional reforms at member states or European level. This, it warned, would result in low economic growth and protracted high unemployment.
A weaker than projected labour market would have both short- and medium-term detrimental effects on private consumption and also on potential growth.
An additional risk is that the debt overhang, the investment shortfall in recent years and slowing total factor productivity could hurt growth in the medium term if they are inadequately addressed by structural reforms, the forecast says.