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‘Vicious circle’ brings European growth to a halt

Friday 11th November 2011

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Economic growth in the European Union has ground to a halt, with the “risk of a new recession”, and will not recover before 2013, the latest economic forecast from the European Commission’s Economic and Financial Affairs Division.

The autumn 2011 forecast, headlined “growth at a standstill” says a “vicious circle” of factors is feeding on European economies, as governments urgently face fiscal consolidation, banks become increasingly nervous to lend, and a weakening real economy mutually reinforce a recessionary impulse.

As a result, economic growth across the EU in 2012 is forecast at 0.5 percent, while world economic growth is assumed to be 0.6 percentage points lower, at 3.5 percent, than in the same forecasts six months ago.

Most risks to the forecasts were on the downside, in an environment of “exceptionally high uncertainty,” Rehn told a media briefing. A deeper sovereign debt crisis, more severe negative feedback loops caused by simultaneous austerity measures, and slower momentum in world trade were the biggest risks.

Inflation, however, is not a problem, and is expected to fall back to 2 percent in 2012 across the EU, in part because recent sharp rises in commodity food and energy prices have ended and are expected to fall.

The gloomy forecast comes in a historic week for the Euro-zone, in which both the Greek and Italian governments have been forced to pledge leadership changes leaders owing to financial market pressure, and Italy has accepted unprecedented external oversight of its austerity budget measures as interest rates on government bonds breached 7 percent – a historic high since Italy joined the Euro-zone.

“There is a broad consensus on the necessary policy action,” said Olli Rehn, the commission’s vice-president for economic and monetary affairs. “What we need now is unwavering implementation.”

Rehn pledged immediately to start using the new rules of economic governance, known as the “six-pack” of measures to force the pace on national debt reduction and improving public finances across the EU.

Across the EU, unemployment is expected to remain stuck at 9.5 percent over the year ahead, and even higher, at a forecast 10 percent, in the 17 of the 27 countries in the EU which use the euro as their common currency.

The forecasts assume that implementation of fiscal restraint and debt reduction measures will occur, although they may not start to take effect before the second half of 2012.

Rehn singled out five EU member states that needed to signal particularly urgent responses to their weak public finances: Belgium, Cyprus, Hungary, Malta, and Poland, and he was critical of assurances received so far from Italy about its plans.

While the Italian government had signalled reforms of the labour market, public sector employment practices, asset sales, market liberalisation, and lower corporate taxes, it was “silent” on how to switch the tax burden from income earners to consumption and property and “does not go far enough” on market competition.

“The commitments are either not sufficiently detailed or supported by timelines, implying serious implementation risks,” Rehn said. Italy’s most important immediate priorities were to restore economic stability and political decision-making capacity, following the pledge by president Silvio Berlusconi to leave office once promised measures are passed by the Italian parliament.

The forecasts anticipate private firms will draw back from new investment “as the growth outlook has darkened”, banks are expected to continue to restrict lending, and households will spend prudently.

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