Europe's economy will rebound next year from a deep slump and accelerate in 2011, the European Commission said on Tuesday, paving the way for major budget deficit cuts across the 27-nation bloc from 2011 at the latest. Skip related content
The European Union's executive arm forecast that the EU economy would expand by 0.7 percent in 2010 and 1.6 percent in 2011 after a contraction of 4.1 percent this year.
In the 16-country euro zone, growth would be 0.7 percent next year and 1.5 percent in 2011, after a 4.0 percent fall in 2009. This is a strong upward revision from its forecast on May 4, when the Commission projected the euro zone to contract by 0.1 percent in 2010.
EU finance ministers agreed on October 20 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.
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 1 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 euros (179 to 359 billion pounds).
"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," Almunia said.
Ahead of a European Central Bank policy meeting this week the forecasts compared to the ECB's last forecast on September 3 for a change in euro zone GDP of between -4.4 and -3.8 percent this year and -0.5 percent to +0.9 percent in 2010.
The Commission said the euro zone emerged from recession in the third quarter with quarterly growth of 0.5 percent, a rate likely to slow to 0.2 percent in the fourth quarter.
SOFT START
The first half of 2010 is likely to be a "soft patch" as temporary factors now boosting growth, like inventory rebuilding, peter out. This is likely to slow euro zone quarterly growth to 0.1 percent in the first two quarters of next year, the Commission said, before it returns to 0.5 percent quarterly growth in the second quarter of 2011.
The bloc's finance ministers agreed last month that, while differences in country situations should be taken into account, a number of countries should start cutting earlier than 2011 and most should cut by more than 0.5 percent of GDP a year.
Shoring up public finances is important to retain the confidence of markets and consumers in government policies after the worst economic downturn since World War Two inflated budget deficits in many countries to unsustainable proportions.
In the twice-yearly economic forecasts, the Commission said that unless policies changed, the aggregate budget deficit in the euro zone would reach 6.9 percent next year and 6.5 percent in 2011 from 6.4 percent seen this year.
This is more than twice the EU limit on budget deficits of 3 percent of GDP. Only Bulgaria will not breach that limit next year, and Sweden will move below the threshold in 2011, the forecasts showed.
Euro zone debt is likely to soar to 84.0 percent of GDP in 2010 from 78.2 percent seen this year and to 88.2 percent 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.
The Commission forecast unemployment in the euro zone would reach 10.7 percent of the workforce in 2010 and 10.9 percent in 2011, up from 9.5 percent seen this year.
After a dramatic fall of 17.9 percent expected this year, investment would continue to shrink next year by 1.3 percent in the euro zone and start growing by 4.1 percent in 2011.
The recovery in 2010 and 2011 is expected to be accompanied by inflation well below the ECB target of just under 2 percent, underlining market expectations the bank will not raise interest rates from record lows of 1 percent until late 2010.
The Commission expects inflation in the euro zone to be 1.1 percent next year against 0.3 percent seen this year and 1.5 percent in 2011. The ECB forecast on September 3 that inflation in 2009 would be between 0.2 and 0.6 percent and in 2010 between 0.8 and 1.6 percent.
"As you can see at some moment the headline inflation has started to be in negative territory but we have always said it is ... temporary," Almunia said.
(Editing by Dale Hudson and Patrick Graham)
Members of a gang arrested in Peru have confessed to killing people and extracting their body fat to sell to international cosmetic companies, police claim.
