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The euro zone economy is expected to start growing again next year, after two years of negative growth, but unemployment will remain stubbornly high, the European Commission had predicted on Tuesday.
The EU executive expects economic growth in the 17-member currency bloc to reach 1.1 per cent in 2014 — after a 0.4 per cent contraction this year, and above the 1 per cent growth forecast last month by the International Monetary Fund (IMF).
But unemployment is forecast to remain at its record high of 12.2 per cent through 2014.
“There are increasing signs that the European economy has reached a turning point,” EU Economy Commissioner Olli Rehn said. “But it is too early to declare victory: unemployment remains at unacceptably high levels,” he added, calling on member states to keep up reforms.
Outlook for 28-member EU
The outlook was slightly better for the 28-member EU, with the gross domestic product (GDP) expected to grow by 1.4 per cent next year, while unemployment was set to fall to 11 per cent, down from 11.1 per cent in 2013.
Part of the problem is the normal “lag” between economic activity and labour market developments, the commission said. The legacy of the crisis, including a lack of credit for small enterprises and economic uncertainty, was also still taking its toll.
Despite overall signs of recovery, clear divergences remain between countries such as Germany, the economic powerhouse of the EU, and other leading members of the currency bloc, which have been hit harder by the crisis.
Unemployment in Germany
Unemployment in Germany is predicted to stand at 5.4 per cent this year, compared with well above 10 per cent in France and Italy. In Spain and Greece, it was projected to be even higher, at around 27 per cent.
France was put on the spot over its deficit. According to the commission, the euro zone’s second-largest economy will miss its 2015 deadline to bring its deficit below the EU benchmark of 3 per cent of GDP, with an expected rate of 3.7 per cent.
But French Finance Minister Pierre Moscovici said the forecast failed to take further planned savings into account. Rehn also pointed out that all projections beyond 2014 were based only on current policies.
“I reiterate our commitment to bringing our deficit below the 3-per-cent mark in 2015,” Moscovici said.
Paris’ deficit targets were extended in June, along with Spain, which is expected to see its deficit go down from an anticipated 6.8 per cent of GDP this year to 5.9 per cent next year, then back to 6.6 per cent in 2015.
Euro zone govt budget plans
Next week, the commission is to pass judgment on euro zone governments’ budget plans for next year after screening them for potential imbalances, in an unprecedented monitoring exercise.
Other challenges to European recovery include a weakening of the global economy, the commission said, with emerging economies growing less robustly, as shown by “disappointing” GDP readings in Indonesia, Mexico, Russia and India.
Rehn also warned the United States against allowing its domestic budget dispute to impact on the global economy. “Navigating around the next fiscal cliff will require very decisive action by US policymakers to avoid another train wreck,” he said.
Euro zone banking sector
Closer to home, the EU’s economy chief stressed the importance of repairing the euro zone’s banking sector to make it more resilient against future crises.
Banking union is seen as a crucial part of this, with a euro zone bank supervisor due to begin work next year, and plans on the table for a joint resolution mechanism.
Rehn said it was important to have “effective and credible” bank stress tests before the supervisor begins work under the auspices of the ECB, but said the bank’s chief had an interest in knowing the true state of banks’ balance sheets.
Inflation to remain low
The commission predicted inflation to remain low in the euro zone and the EU, with rates close to 1.5 per cent over the forecast period.
This gives the ECB room to cut interest rates. However, most analysts do not expect such a move at this month’s rate-setting meeting on Thursday.
On the positive side, the commission also found that a determined response to the crisis had reinstated faith in the future of the euro currency.
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