Rehn examining need for more austerity in 2013

EU commissioner Olli Rehn will examine whether the Government should take additional budget measures next year after cutting his Irish growth forecast and saying the euro zone economy will hardly grow at all in 2013.

His latest projections added to concerns about Spain, which is battling to avoid further external aid, and fuelled anxiety that the debt crisis is holding back Germany, the motor of the European economy.

Although Dublin is wedded to a €3.5 billion “adjustment” target in next month’s budget, Mr Rehn left open the possibility that a slightly bigger package might be required in light of his new figures.

“Whether this will have any impact on the fiscal consolidation path has to be assessed in the coming period,” the commissioner said when asked whether a larger consolidation might now be needed.

He said, however, that the Irish bailout plan was designed “quite carefully” and took into account “this kind of a certain slowdown” in growth.

“But, as I said, we will have to see this, together with the Irish Government and our partners.”

The commission said Ireland’s growth rate would quicken to 2.2 per cent of national output in 2014, a forecast exceeding the 2 per cent expansion foreseen for Germany.

However, projected growth of 1.1 per cent next year is down from 1.9 per cent in the spring. Dublin’s own updated projections are not yet available.

The projected decline is in keeping with a report from the EU-International Monetary Fund troika a fortnight ago. The commission also expects growth this year to come in at 0.4 per cent of gross domestic product instead of the 0.5 per cent forecast in spring.

The troika said then that Dublin was determined to meet the bailout target of a budget deficit “below” 7.5 per cent of national output next year. It now forecasts a 7.5 per cent deficit in 2013 and a 5 per cent one in 2014.

“Of the programme countries, Ireland stands out,” Mr Rehn told reporters. “Growth is expected to remain in positive territory this year and to accelerate over the forecast horizon.”

He did not answer a question as to whether the national debt – forecast at 122.5 per cent of GDP next year and 119.2 per cent in 2014 – would be sustainable without a deal to ease the bank rescue cost.

Growth warning

Mr Rehn was speaking as the commission warned that economic growth in the euro zone at large would decelerate to 0.1 per cent next year from 0.4 per cent in 2012, before rising in 2014 to 1.4 per cent.

The commission said German growth this year and next would remain static at 0.8 per cent, downgrading a 1.7 forecast for 2013 in the spring.

European Central Bank president Mario Draghi took up this theme yesterday, saying the crisis was starting to hurt Europe’s biggest economy: “Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area,” he said.

“But the latest data suggest that these developments are now starting to affect the German economy.”

Ahead of EU budget talks in London last night with prime minister David Cameron, Chancellor Angela Merkel told the European Parliament in Brussels that she would do “everything” to keep a strong Britain” in the EU.

“I cannot imagine that the UK would not be part of Europe,” said Dr Merkel, adding that she opposed the idea of a two-speed Europe.

She called on EU leaders to agree an “ambitious plan” for the reconstruction of the euro zone at their December summit, adding that EU institutions should to be given “real rights of intervention in national budgets”.