Europe's economy will rebound next year from a deep slump and accelerate in 2011, the European Commission said today, paving the way for major budget deficit cuts across the union from 2011 at the latest.
The EU's executive arm forecast that the EU economy would expand by 0.7 per cent in 2010 and 1.6 per cent in 2011 after a contraction of 4.1 per cent this year.
In the 16-country euro zone, growth would be 0.7 per cent next year and 1.5 per cent in 2011, after a 4.0 per cent fall in 2009. This is a strong upward revision from its forecast on May 4th, when the Commission projected the euro zone to contract by 0.1 per cent in 2010.
The EC estimates that Irish GDP will drop by 7.5 per cent this year, however, and it expects the economy to contract by 1.4 per cent next year before posting 2.6 per cent growth in 2011.
Deficits next year will amount to 14.7 per cent of gross domestic product in Ireland, 10.1 per cent of GDP in Spain, 8.2 per cent in France and 5 per cent in Germany, the region’s largest economy, the commission said.
Inflation next year will remain below the 2 per cent ceiling set by the ECB, the commission said, with annual price declines projected in Ireland in 2009 and 2010. The euro area inflation rate will be 0.3 per cent this year, rising to 1.1 per cent next year and 1.5 per cent in 2011, it said.
EU finance ministers agreed on October 20th and EU leaders backed them last Friday that if the commission forecasts showed the recovery was strengthening and self-sustaining, deficit cuts in all EU countries should start in 2011 at the latest.
"With this forecast I will recommend to Ecofin (EU finance) ministers next week to declare or confirm that 2011 is the year when the EU and euro area start in aggregate terms this fiscal exit strategy," Economic and Monetary Affairs Commissioner Joaquin Almunia told a news conference.
Mr Almunia said the economy was coming out of recession thanks to government and central bank support measures and urged all the announced steps should be still implemented. He also said banks had to be repaired to make the recovery sustainable.
In its forecasts, the commission quoted an estimate by the Committee of European Bank Supervisors (CEBS) from Oct 1st which said that future potential losses due to write-downs on loans and securities for euro area banks for 2009 and 2010 were in the range of some €200 to €400 billion.
"Without further repairing of balance sheets of many banks, credit flows will not be at normal levels and without normal credit flows we will not have a sustained recovery in our economy," Mr Almunia said.
Ahead of a European Central Bank policy meeting this week the forecasts compared to the ECB's last forecast on Sept. 3 for a change in euro zone GDP of between -4.4 and -3.8 per cent this year and -0.5 per cent to +0.9 per cent in 2010.
The commission said the euro zone emerged from recession in the third quarter with quarterly growth of 0.5 per cent, a rate likely to slow to 0.2 per cent in the fourth quarter.
Euro zone debt is likely to soar to 84.0 per cent of GDP in 2010 from 78.2 per cent seen this year and to 88.2 per cent of GDP in 2011.
Finance ministers will discuss the commission's forecasts and their implications for deficit-cutting next week and the commission will propose deadlines for bringing down the deficits of some of the countries.
The ministers are wary of withdrawing state support to the economy too early so as not to cripple the nascent recovery.
Reuters