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European Commission Offers Grim Prediction for Economy European Commission Offers Grim Forecast for Economy
(about 7 hours later)
BRUSSELS — The European Commission delivered a bleak assessment Friday of Europe’s economic prospects, saying that growth would be just 0.1 percent in the 27-nation European Union in 2013 and that the 17-nation euro zone would shrink 0.3 percent over the same period. BRUSSELS — A top E.U. official warned Friday that the economy of the euro area would shrink for the second year in a row and that countries like France and Spain would miss fiscal targets meant to ensure the stability of the common currency.
The downbeat forecast, coming a day after data showed a slump in business activity in the euro area worsened unexpectedly this month, added to perceptions that Europe is continuing to struggle with the dual burdens of trying to stimulate growth while cutting spending to pare deficits and balance budgets. Olli Rehn, the European commissioner for economic and monetary affairs, forecast growth across the 27-nation European Union of just 0.1 percent this year and a contraction of 0.3 percent among the 17 countries in the euro zone.
“The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” Olli Rehn, the European commissioner for economic and monetary affairs, said in a statement. Mr. Rehn’s presentation signaled “another year of falling output and rising unemployment in store in 2013,” said Tom Rogers, a senior economic adviser at Ernst & Young.
Mr. Rehn insisted that Europe’s belt-tightening policies were working and would lay the groundwork for a recovery. He said the European economy should expand in 2014, with growth reaching 1.6 percent across the Union and 1.4 percent in the euro area. Prospects for growth in many parts of the Union were “very disappointing,” Mr. Rehn acknowledged at a news conference, where he presented a so-called winter economic forecast prepared by his department at the European Commission, the Union’s administrative arm.
“We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation,” he said in the statement. “The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” Mr. Rehn said.
Mr. Rehn was presenting a so-called winter economic forecast that has taken on greater significance as his department at the European Commission, the Union’s administrative arm, gains greater responsibility for overseeing government budgets. Just three months ago, the commission forecast that the euro area economy would grow by 0.1 percent this year.
In the coming months, Mr. Rehn must decide whether to recommend punishing countries for missing their targets, possibly leading to large fines, or to offer them leniency. Mr. Rehn said the European economy should resume expanding in 2014, with growth reaching 1.6 percent across the Union and 1.4 percent in the euro area.
Europe’s insistence on austerity has been criticized by some economists who see it as creating a self-perpetuating cycle. As government spending is cut to meet deficit targets, they argue, overall demand is diminished, weakening tax revenue and further straining finances — even as the denominator of the deficit-to-G.D.P. equation shrinks. But the downbeat forecast, coming a day after data showed that a slump in business activity in the euro area worsened unexpectedly this month, added to perceptions that Europe continues to struggle to stimulate growth while cutting spending to pare deficits.
One of the biggest test cases for Mr. Rehn will be France, the second largest economy in the euro area. The commission also forecast that unemployment would continue to rise in the euro area this year, to 12.2 percent, up from 11.4 percent in 2012.
On Friday, the commission said low growth meant the French budget deficit was expected to be 3.7 percent of gross domestic product, down from an estimated 4.6 percent in 2012, but well above the government’s official target of 3 percent. The commission also warned that the deficit could rise again to 3.9 percent in 2014. In Spain, the commission said it expected joblessness to hit 26.9 percent, up from 25 percent last year. In Greece, the forecast was for unemployment to leap to 27 percent from 24.7 percent a year earlier.
Jean-Marc Ayrault, the French prime minister, warned earlier this week that his government would need to seek leniency from the commission because the 3 percent target was still out of reach. Even in buoyant Germany, which is expected to grow this year by 0.5 percent, unemployment was seen nudging up slightly this year to 5.7 percent from 5.5 percent in 2012.
In its report Friday, the commission said the French economy stagnated last year and that G.D.P. was projected to increase only by 0.1 percent in 2013. It attributed the stagnation on declining spending by households linked to rising unemployment — which was expected to reach 10.7 percent in 2013, from an estimated 10.3 percent in 2012, and 11 percent in 2014, according to the report — and to a drop in confidence among entrepreneurs. The litany of grim figures will add fuel to a furious debate over whether an insistence on austerity is creating a self-perpetuating cycle where cuts to state spending to meet E.U. targets diminish demand, weakening tax revenue and further straining government finances.
In the case of Spain, the commission said tax increases and a slashing of year-end bonuses for public sector workers were responsible for a significant decline in the budget deficit, although that figure excluded the effects of spending to rescue the banking sector. Yet blaming the effects of belt-tightening for Europe’s continued economic woes, particularly in the case of Spain, is too simplistic, said Guntram B. Wolff, the deputy director of Bruegel, a research organization.
The commission estimated that the Spanish deficit would fall to 6.7 percent this year, down from 10.2 percent in 2012. But it warned that the deficit could rise again to 7.2 percent in 2014. “Perhaps the real reason for the deterioration in the economic situation in Europe was the massive drop in confidence of international investors in the ability of the euro area to overcome its more systemic problems,” Mr. Wolff wrote in a blog posting shortly after Mr. Rehn’s news conference.
The European Union has vowed to show a new determination to enforce discipline after the failure to do so over the last decade was a factor in several debt crises that began with Greece and threatened to undermine the euro. The commission said Spain’s deficit was expected to fall to 6.7 percent of gross domestic product this year, down from 10.2 percent in 2012, partly because of tax increases and a sharp reduction in year-end bonuses for public-sector workers. But that still fell wide of the official target of 4.5 percent, and the commission warned that Spain’s deficit could rise to 7.2 percent in 2014.
A “six pack” of rules approved in 2011 tightened E.U. scrutiny of national budgets and economic policies and introduced swift penalties for profligate states. Under rules agreed to this week, dubbed the “two pack,” the European Commission would gain new powers to request a redraft of euro states’ budget plans — although that would only apply as of the budget review procedure in 2014. In the case of France, the commission attributed economic stagnation to declining household spending linked to rising unemployment — which the report said was expected to reach 10.7 percent in 2013, then climb to 11 percent in 2014, up from an estimated 10.3 percent in 2012. In addition, the report cited a drop in confidence among French entrepreneurs.
Carsten Brzeski, a senior economist with ING in Belgium, said that Mr. Rehn was likely to be caught in coming months in a familiar bind between showing toughness and avoiding a political battle with a major member state like France over the wisdom of forcing more budget tightening in a downturn. The report forecast that the French budget deficit for 2013 would be 3.7 percent of G.D.P., down from an estimated 4.6 percent in 2012, but well above the government’s official target of 3 percent. The commission also warned that the deficit could rise to 3.9 percent in 2014.
“The way forward will be a walk on a tightrope,” Mr. Brzeksi said. Mr. Rehn will need to weigh “strict application of the rules to regain credibility or softer, and for some smarter, application not to overburden the battered economies with additional austerity.” In a sign of flexibility, Mr. Rehn said deadlines for meeting budgetary targets could be extended in the cases of France and Spain, assuming their governments could demonstrate progress in implementing fiscal reforms despite the unexpectedly tough economic environment.
As long as countries “have a credible medium-term strategy for fiscal consolidation,” then “it can make sense to take into account weaker growth to have more time for the fiscal adjustment,” said Mr. Rehn, who will probably make those decisions in May.
But Mr. Rehn also underlined that it was vital for France to present “adequate and convincing measures.”
In Paris, the French finance minister, Pierre Moscovici, said Friday that he would make the case with European officials in coming weeks that his country should be given more time to reach its deficit reduction target of 3 percent of G.D.P. The French did not want “to add austerity to recession,” Mr. Moscovici said at a news conference.
But granting waivers to governments that fail to meet their targets raises a question that has dogged Europe ever since monetary union: How strictly should the commission enforce rules requiring politically unpopular measures, particularly on powerful members like France?
Before the euro was introduced, participating countries decided on binding fiscal rules — including fines to punish countries that overspent or otherwise jeopardized the ability of disparate economies to run on a single currency. Soon, large countries like Germany — which was among those demanding the rules in the first place — flouted the so-called Stability and Growth Pact when it suited them.
The Union has vowed to enforce discipline with new determination, after the failure to do so over the past decade was a factor in several debt crises that began with Greece and threatened to undermine the euro.
A “six pack” of rules approved in 2011 tightened E.U. scrutiny of national budgets and economic policies and introduced swifter penalties for profligate states. Under rules agreed to this past week, dubbed the “two pack,” the European Commission would gain new powers to request that euro states redraft their budget plans — but even if approved, that would not be implemented until 2014.
Last year, E.U. finance ministers agreed for the first time to punish one of their members for flouting the bloc’s budget rules and decided to suspend payment to Hungary of nearly €500 million, or $660 million, in development money unless it made progress on reducing its deficit.
But Hungary’s aid was later restored, and the bloc still has never imposed fines on one of its members for breaking budget rules.
“This watchdog often turned out to be a paper tiger, often overruled by national governments when push really came to shove,” Carsten Brzeski, a senior economist with ING in Belgium, wrote in a research note on Friday, referring to the commission’s record in reducing deficits.
Mr. Brzeski said he now expected to see a “new fudge or elegant way out” that could be used by officials like Mr. Rehn to avoid imposing sanctions on deficit scofflaws.
A focus on measuring the progress of countries like France toward achieving structural adjustments “could please the austerity supporters and, due to methodological uncertainties, could give sufficient negotiation room for the austerity opponents,” Mr. Brzeski wrote.
David Jolly contributed reporting from Paris. David Jolly contributed reporting from Paris.