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UPDATE 1-Italy and France to lag Germany in euro zone recovery
February 25, 2014 / 1:45 PM / 4 years ago

UPDATE 1-Italy and France to lag Germany in euro zone recovery

* Commission predicts euro zone growth of 1.2 percent this
year
    * Germany set for 1.8 percent jump - three times that of
Italy
    * EU economy chief Rehn - 'worst of crisis' may be over
    * Inflation to stay low, unemployment high


    By John O'Donnell and Robin Emmott
    BRUSSELS, Feb 25 (Reuters) - Germany is set to accelerate
away from France and Italy in 2014 as the fragmented euro zone
economy gradually recovers from its worst crisis, the European
Commission said on Tuesday.
    In a departure from the gloom of recent years, Brussels
slightly increased its growth prediction for the bloc's
9-trillion-euro economy to 1.2 percent in 2014 from an earlier
1.1 percent.
    It was powered chiefly by an expected 1.8 percent jump in
the euro zone's biggest economy Germany.
    The statistics also made clear the scale of the challenge
facing Italy and its new prime minister, Matteo Renzi, in
turning around the bloc's third-largest economy. The Commission
predicts meagre growth of 0.6 percent this year.
    No.2 economy France is expected to grow 1 percent in 2014.
    For the bloc as a whole in 2015, the commission raised its
forecast slightly to 1.8 percent. 
    "Recovery is gaining ground," said Olli Rehn, the EU
commissioner in charge of economic policy. "The worst of the
crisis may now be behind us," he said, cautioning, however, that
the recovery was "still modest".
    The improving growth outlook will relieve the European
Central Bank, but policymakers there will also have to grapple
with forecasts showing persistently low inflation and no
significant drop in the region's record unemployment rate.  
    Meanwhile, the economic output figures outline how Europe
still lags the United States. The U.S. economy is expected to
grow by around 3 percent in 2014, buoyed by a massive money
printing programme that the ECB has been unable to emulate.
    The figures draw a clear dividing line in the euro zone
between southern countries such as Greece, struggling
economically and arguing for more freedom to spend, and Germany,
buoyed by strong exports and determined to enforce thrift.
    Paul De Grauwe, an economist with the London School of
Economics, blamed Germany for hampering the ECB and said the
time had come for the central bank to act following its creation
of a special emergency programme to buy state bonds through
outright monetary transactions, known as OMT.
    "They need to take some risks," he said. "The ECB has been
bold once when they announced OMT but since that it has done
nothing.
    "The Germans are afraid of their own shadow. The U.S. has
been willing to go further in stimulating the economy. As a
result, growth has accelerated," he said.
    ECB President Mario Draghi has less freedom, however. Under
its statutes, the bank is banned from buying bonds directly from
governments, although it can find ways to buy them from banks,
for example, on the open market or accept them as security in
return for finance.
    Some in the market expect the ECB's next move could be to
offer a further round of cheap, long-term loans to banks.
    Complicating the picture further for the ECB, the Commission
sees consumer price inflation at well below the central bank's
target of just below 2 percent. Inflation is likely to be 1
percent in 2014 and 1.3 percent next year.MISSED GOALS
    Whatever the modest improvement in economic outlook,
unemployment will barely budge from record highs of 12 percent
in 2015, according to the EU executive.
    Here again, there is a stark contrast between Germany, with
unemployment of just over 5 percent, and Spain, where one in
four is unemployed.
    "We know how difficult the situation remains in many member
states, especially with unemployment and youth unemployment so
high," European Commission President Jose Manuel Barroso told
the European Parliament.
    The problem of modest economic growth and high unemployment
is compounded by the debts of Europe's top economies. 
    While Berlin will not spend more than it taxes, reaching a
balanced budget this year and next, Madrid will see its budget
deficit rise in 2015 to 6.5 percent of economic output, unless
it deepens some of the toughest spending cuts in a generation.
    That raises doubts about Prime Minister Mariano Rajoy's
promises to cut income taxes as of next year, when a general
election will be held. Spain is far from meeting the EU ceiling
on deficits of 3 percent.
    In the Commission's outlook, France too will miss a goal to
reduce its deficit below 3 percent despite being given two extra
years to meet this target. The Commission predicted a shortfall
of 4.0 percent this year and 3.9 percent in 2015.
    President Francois Hollande's government is hoping that the
recovery will help it cut the public deficit, although the
national audit office has said this is optimistic.
    Economists doubt the wisdom of restricting spending at a
time of weak growth. "There has been this narrative in Germany
that in times of crisis you need to spend less," said De Grauwe.
"But we should not be spending less."

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