Spending cuts to slow Europe's 2011 growth

City A.M. Reporter
EUROZONE economic growth will slow slightly next year as governments cut spending, but private demand will boost growth in 2012, the European Commission announced today.

Growth across the 27 eurozone nations is forecast to slow to 1.5 per cent in 2011 from 1.7 per cent seen this year, but rebound to 1.8 per cent in 2012, the commission said in the latest of its twice-yearly economic forecasts.

"With private domestic demand as a whole strengthening, the recovery is said to be increasingly self-sustaining over the forecast horizon," Economic and Monetary Affairs Commissioner Olli Rehn told a briefing.

The main growth engine will be Germany, the bloc's biggest economy, where growth is likely to slow substantially next year from the 3.7 per cent achieved in 2010, but still be a respectable 2.2 per cent.

A weaker global economy will cut demand for euro zone exports, while many of the governments will be slashing spending and raising taxes to return public finances to a sustainable path.

The aggregated euro zone budget deficit will shrink next year and in 2012, but debt will continue to rise, with that of Belgium and Ireland becoming larger than their annual output, the Commission said.

Concern over the ability of Ireland to service its huge debt, which was boosted by government support to the ailing banking sector, has forced Dublin to seek EU financial help and prompted concerns that Portugal and even Spain could be next.

The budget deficit of the countries using the euro will fall to 4.6 per cent of gross domestic product next year from 6.3 per cent expected this year and further to 3.9 per cent in 2012.

Government debt is set to rise to 86.5 per cent of GDP next year from 84.1 per cent in 2010 and increase to 87.8 per cent in 2012.

"A determined continuation of fiscal consolidation and frontloaded policies to enhance growth, are essential to set a sound basis for sustainable growth and jobs," Rehn said.

"The turbulence in sovereign debt markets underlines the need for robust policy action."

The market spotlight has now turned to Portugal, which has a large debt, but very slow growth and an uncompetitive economy.

Weighed down by heavy cuts in budget spending and higher taxes, Portugal will fall back into recession, contracting one per cent in 2011, and return only to weak growth of 0.8 per cent in 2012, the Commission forecast.

Lisbon plans to cut its budget deficit to 4.9 per cent in 2011 from 7.3 per cent this year, but its debt will rise to 88.8 per cent of GDP in 2011 from 82.8 per cent seen this year.

"In case the fiscal target would be missed because of somewhat lower growth materialising, then the government assumes that is essential still to meet the fiscal target if necessary by taking additional measures," Rehn said.

"And moreover, it is clear that it is essential that Portugal will develop and implement equally ambitious structural reforms to reach its growth potential," he added.

Ireland, which on Sunday agreed on an €85bn rescue package from the EU and the International Monetary Fund, will see its economy grow 0.9 per cent next year after a 0.2 per cent contraction this year, but growth should accelerate to 1.9 per cent in 2012, the Commission said.

Dublin will have the biggest budget gap in the EU of 32.3 per cent this year, because of huge costs of supporting its ailing banking sector, but will reduce that shortfall to 10.3 per cent next year and cut it further to 9.1 per cent in 2012.

"The Irish economy is flexible and while there are serious challenges concerning public finances and especially the banking sector... it has the capacity of rebounding rapidly from this recession. Export growth is already a fact," Rehn said.

Spain, also in the market spotlight because of its low growth and a potentially costly repair of its banking system, will contract 0.2 per cent in 2010 but grow again 0.7 per cent in 2011 and 1.7 per cent in 2012, the Commission said.

Its deficit is to fall to 6.4 per cent in 2011 from 9.3 per cent in 2010 and to 5.5 per cent in 2012 as Madrid's austerity measures kick in.

Spain wants to cut its budget deficit to six per cent next year, a target Rehn called challenging.

"The Spanish fiscal strategy...is on track. If growth next year is lower than expected, it is necessary to take further measures to make sure that the fiscal target is met," he said.

While deficits will decline, debt will still rise.

The highest debt of all EU countries will be in Greece, where debt will balloon to 105.2 per cent of GDP next year from 140.2 per cent in 2010 and rise even further to 156 per cent in 2012.

Belgium will see its debt rise from 98.6 per cent of GDP this year to 100.5 per cent in 2011 and to 102.1 per cent in 2012.

Ireland's debt is also likely to grow to 107 per cent of GDP next year from 97.4 per cent expected in 2010, and to jump to 114.3 per cent in 2012.