EU downbeat on economy amid rising inflation

Slower growth and record-high inflation are the gloomy economic forecasts for the EU’s near future, according to Commission estimates presented on 28 April.

Growth in the EU is expected to cool down from 2.8% to 2% this year and to 1.8% in 2009, Commissioner for Economic Affairs Joaquin Almunia announced yesterday. This is half a percentage point lower than predicted in last autumn’s forecasts, he added. 

Among the reasons for this downturn, Almunia cited an overall “less favourable global environment,” with a US recession looming, ongoing financial turmoil and rising commodity prices for oil and energy. 

“The financial turmoil is proving deeper, wider and longer-lasting while the downturn in the US looks set to be more pronounced and protracted than assumed in the autumn forecast,” Almunia said. 

Despite the expected slowdown, prospects for the EU remain much more positive than for the bloc’s main competitors, namely the US and Japan, according to the commissioner. Moreover, Almunia expressed his confidence that growth would pick up pace again from the third quarter of this year onwards.

French Finance Minister Christine Lagarde nevertheless labelled the Commission’s outlook for 2009 “very, very pessimistic,” saying Paris would not revise its own forecast of about 2.5% growth. 

However, Almunia added that the rising inflation, which – fed by rising food and energy prices – is set to to hit 3.6% this year, poses a key problem for future growth. On a more positive note, he said he expected inflation to fall to 2.4% in 2009. 

For the eurozone, inflation is expected to hit 3.2% this year, which would be the highest since the euro’s launch in 1999. 

Meanwhile, a report by the European Trade Union Confederation (ETUC), entitled ‘Time to Act!’, warned policymakers against “misplaced complacency”. It called for macroeconomic policies to stabilise economic activity right now and “prevent the economy from getting caught in a further downward spiral”. 

The Commission’s predicted economic slowdown is also set to have a negative impact on some member states’ deficit. Within the eurozone, Almunia identified France as the “most worrying” example, with the deficit forecasted to reach 2.9% this year and 3.0% in 2009 – the maximum allowed under the Maastricht criteria for financial stability. The commissioner said he did not want to rule out the launch of an early warning procedure against France to get the country back on track. 

Italy and Portugal also remain countries of concern with their deficits predicted to rise to 2.4% (in Italy) and 2.6% (in Portugal) respectively in 2009. 

Outside the eurozone, Hungary, the UK and Romania are likely to perform the worst. In Hungary, the deficit is expected to shrink further but likely to remain clearly above the 3% reference (4% in 2008 and 3.6% in 2009), confirming previous assessments that the county would not be ready to join the eurozone beyond 2012 (see EURACTIV Links Dossier on ‘Enlargement and the Euro’). 

The Commission also said it had an eye on Romania where the deficit is expected to rise to 2.9% this year to reach 3.7% in 2009. 

In the UK – which has not indicated that would adopt the euro anytime soon, the deficit is set to rise to 3.3% this year and for the year to come, which will lead to the opening of a deficit procedure by the Commission on 11 June, Almunia announced. 

Positive news was delivered to Slovakia and Poland, where the Commission announced the closure of deficit procedures on 7 May (Slovakia) and 11 June (Poland). 

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