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European Commission Offers Grim Forecast for Economy Renewed Signs of Europe’s Economic Weakness
(about 5 hours later)
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. BRUSSELS — Despite growing confidence that Europe is managing its debt crisis and is poised to embark on a recovery, fresh developments on Friday indicated that the region continues to struggle to stimulate growth while cutting spending to pare deficits.
A top European official warned on Friday that the euro area economy would shrink for the second consecutive year and that countries like France and Spain would miss fiscal targets meant to ensure the stability of the common currency. Separately, the European Central Bank announced that the region’s banks planned to repay less than half the expected amount of low-interest loans they took out a year ago. And Moody’s Investors Service downgraded Britain’s government bonds from its top AAA rating.
The economic doldrums could set the stage for ripple effects for the United States, particularly in the financial markets.
“The straight growth channel in Europe is weighing on the U.S. right now, but the more important channel through which the euro area hits the U.S. is in financial markets, and problems that could affect consumer and business sentiment,” said Joseph Lupton, senior global economist at JPMorgan Chase. “Where it becomes a big deal is if there’s some other stress point, if something else flares up in the financial markets.”
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.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.
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’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.
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. Prospects for growth in many parts of the European 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 bloc’s administrative arm.
“The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” Mr. Rehn said.“The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” Mr. Rehn said.
Just three months ago, the commission forecast that the euro area economy would grow by 0.1 percent this year. Just three months ago, the commission forecast that the euro area economy would grow by 0.1 percent this year, and other officials had talked about a turnaround starting this year.
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. Mr. Rehn said the European economy should resume expanding in 2014, with growth reaching 1.6 percent across the European Union and 1.4 percent in the euro zone.
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. In another sign of continued weakness in the financial system, European banks plan to repay less than half the expected amount of low-interest loans they took from the European Central Bank.
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. The central bank lent more than 1 trillion euros ($1.33 trillion) in two operations in December 2011 and February 2012. The cheap loans provided a life raft for the region’s banking sector, which ran into difficulty during the debt crisis. During the period of uncertainty, banks refused to lend to one another. Late last month, banks paid back 137 billion euros of the loans, more than expected, suggesting that at least some banks were able to raise money on their own.
But on Friday, the central bank said that banks that took the second round of loans planned to return 61 billion euros in the latest repayment, much less than many had expected.
Moody’s downgraded its rating on Britain’s debt to Aa1 from AAA, citing continuing weakness in the country’s medium-term growth outlook and rising debt burden. The rising debt means “a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016,” the agency said.
Britain has been cutting spending to pare its deficit but has failed so far to stimulate growth. Its economy expanded 0.9 percent in the third quarter but contracted 0.3 percent in the fourth quarter.
Standard & Poor’s and Fitch Ratings still have AAA ratings on Britain’s debt, though their outlooks are negative.
The move comes after other prominent downgrades. Moody’s lowered France from its top rating in November. Before that, Standard & Poor’s downgraded the United States from AAA in August 2011 and lowered France and Austria in January 2012.
In the euro zone, the European Commission also forecast that unemployment would continue to rise this year, to 12.2 percent, up from 11.4 percent in 2012.
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.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.
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. 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.
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. The grim figures add fuel to a furious debate over whether an insistence on austerity is creating a self-perpetuating cycle where state spending cuts diminish demand, weakening tax revenue and further straining government finances.
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. 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.
“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.“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 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. 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.
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. 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 this year, 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.
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 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.
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. 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 adopting 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.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.”

David Jolly contributed reporting from Paris and Catherine Rampell from New York.

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.