EU sees deeper euro zone recession in 2013, slower deficit cuts

BRUSSELS Fri May 3, 2013 5:57am EDT

People walk past the shop window of a jewelry store in central Barcelona November 27, 2012. REUTERS/Albert Gea

People walk past the shop window of a jewelry store in central Barcelona November 27, 2012.

Credit: Reuters/Albert Gea

BRUSSELS (Reuters) - The euro zone economy will contract by more than expected this year and budget deficits will decline more slowly, the European Commission said on Friday as it set out forecasts for the next two years.

France, Spain, Italy and the Netherlands - four of the five largest euro zone economies - will be in recession through 2013, the Commission's forecasts showed, with only Germany, the largest euro zone economy, managing to eke out growth.

"In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe. The EU's policy mix is focused on sustainable growth and job creation," EU Economic and Monetary Affairs Commissioner Olli Rehn said.

"Fiscal consolidation is continuing, but its pace is slowing down. In parallel, structural reforms must be intensified to unlock growth in Europe."

The Commission said the euro zone economy would shrink 0.4 percent this year and grow 1.2 percent next year, revising down its projections from last February of a 0.3 percent recession and 1.4 percent growth respectively.

The forecast is roughly in line with the mid-point of the -0.9 to -0.1 percent range forecast for 2013 by the ECB in March, and the 0.0 to 2.0 percent growth range seen for 2014.

The expectations underline a shift of focus in the 17 countries that share the euro from sharp fiscal consolidation in the first years of the sovereign debt crisis to economic growth as earlier radical deficit cuts and European Central Bank action restored some market trust in euro zone finances.

Economic growth will be slower than thought in all the biggest euro zone countries, with France even dipping into a recession of 0.1 percent, rather than growing 0.1 percent as forecast in February, the Commission said.

The only positive change against the February forecasts was Greece, where the economy is now seen contracting 4.2 percent this year, rather than the previous 4.4 percent.

To reduce the negative impact of fiscal consolidation on growth, the overall euro zone budget deficit reduction will be marginally slower this year and next compared with forecast from three months ago. Country differences are bigger.

The aggregate euro zone deficit is to fall to 2.9 percent of gross domestic product this year and to 2.8 percent next year from 3.7 percent last year -- only 0.1 percentage point for each year less than previously envisaged.

But the slower consolidation will be most pronounced in Italy, which is now seen reducing its budget shortfall only to 2.9 percent of GDP this year from 3 percent in 2012, rather than to the 2.1 percent forecast in February.

The main reason for that is a deeper than expected recession this year and a more modest economic rebound in 2014, when Rome is to bring the budget gap down to 2.5 percent, against the earlier forecast 2.1 percent.

France, also in recession, is to have a budget shortfall of 3.9 percent this year and 4.2 percent in 2014 unless policies change, against earlier forecasts of 3.7 percent and 3.9 percent respectively.

Portugal, on a euro zone financial lifeline, will cut its budget deficit this year only to 5.5 percent of GDP from 6.4 percent last year because the recession there will be deeper than expected. The 2013 target in February was 4.9 percent.

(Reporting By Jan Strupczewski; editing by Luke Baker)

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Comments (7)
cammanchee wrote:
Nice. Well this should be a great signal for the stock market to make a decent increase today being as is seems that the worse the news is the more it increases. The market will get boosted today based on all the great “financial stimulus” plans that seem to be a never ending cycle of printing more and more money, buying more and more bonds, and giving companies cheaper and cheaper money that they really won’t use in an effective manner to benefit everyone, will continue with no end in sight.

You would think after 4 1/2 years of all that stimulus money that the worlds central banks have provided with pretty much little affect in boosting the economy, they would realize those plans are utterly useless. Like many have said, all these great minds seem to not get through their thick skulls is the fact that without meaningful hiring and wage increases in the U.S. and the world over, you can provide all that money you want and it is not going to work. It should not be very hard to figure out that when you restrict the amount of money that the vast majority of the population can earn and freely spend, you cannot have economic growth.

I’m sorry, when you let the wealthiest 1200 – 1300 people in the world control/hold most of the world’s money, literally trillions and trillions of dollars, this is what you get. Sorry, they won’t and can’t spend enough on themselves to support all the businesses throughout the world. At some point everyone else has to start getting a fair share of that wealth so they can purchase things outside of the basic necessities. Until this happens, have fun trying to see any signifacant amount of growth anywhere in the world.

May 03, 2013 6:57am EDT  --  Report as abuse
pbgd wrote:
When will they get it that Europe is experiencing a gradual decline — this has nothing to do with the crisis. The focus of world trade has permanently shifted from the Atlantic to the Pacific, and Europe will probably never be able to regain its former eminence in world trade.

May 03, 2013 8:05am EDT  --  Report as abuse
Willie12345 wrote:
What those poor Europeans need is a good ole “Recovery Summer” !! Let’s send Joe Biden over there to help those poor folks out.

May 03, 2013 9:43am EDT  --  Report as abuse
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