• The eurozone is facing a 'mild' recession this year, says Rehn (Photo: ec.europa.eu)

EU urges more cuts, despite eurozone recession

11.05.12 @ 17:04

  1. By Valentina Pop
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BRUSSELS - The EU commission on Friday (11 May) confirmed earlier predictions that the eurozone economy will contract by 0.3 percent this year, with worsening forecasts for Greece, Spain and the Netherlands.

In its so-called spring economic forecast, the commission expects the euro area economy to stay in a 0.3 recession this year whereas the EU as a whole will have zero-growth, as predicted in an "interim" forecast published in February.

At a press conference on Friday, EU economics commissioner Olli Rehn tried to put a positive spin on the report, saying that "recovery is in sight" as the EU is supposed to return to one-percent growth in 2013.

But the previous "autumn forecast" published only six months ago also promised growth already this year, and was sharply contradicted in most countries. This was especially the case in Spain, where the economy is expected to shrink by 1.8 percent this year. The commission had given it a growth estimate of 0.7 percent in November.

Recession in Greece this year (4.7%) was also under-estimated by almost two percent six months ago. Portugal, another country under EU-IMF assistance, is struggling with a 3.3 percent recession this year, 0.3 percent more than the commission estimated last year.

Well-off countries such as the Netherlands or Slovenia are also in recession. Again, the commission had underestimated their growth figures last year.

The only countries doing better than expected six months ago are Poland (2.7% GDP growth) and Luxembourg (1.1% GDP growth).

Asked whether the austerity drive is not undermined by all these worse-than-expected statistics, Rehn said this was a "too simplistic" answer.

"We cannot pile debt over debt. It is essential that we are continuing fiscal consolidation and in parallel boost growth by targeted investments."

As part of the new focus on growth embraced by EU leaders, including Germany's fiscal hawk Chancellor Angela Merkel, the commissioner mentioned the increased use of EU banks such as the European Investment Bank whose capital is set to be increased in the coming months, as well as "project bonds" - an older idea tabled by the commission.

Rehn said that the European Parliament next week was due to discuss legislation on the project bonds. "The aim is to move it through parliament quickly and I hope in the coming weeks we will finalise it so as to use these project bonds to leverage funds for major infrastructure projects in Europe."

Recent statements by German finance officials suggesting openness to a higher inflation rate and wage increases in Europe's powerhouse are "reflecting the discussion on rebalancing the EU economy" between surplus and deficit countries, "which is positive for the euro area economy," Rehn said.

Spain and Greece

He also repeated his comment that the deficit and debt rulebook is "not stupid" and that the commission will take into account a worsening of the economic conditions when judging the budgets and measures adopted by countries to reduce their deficit. Country-by-country recommendations are due on 30 May, with Spain in particular being seen as a test case for EU's revamped budget rules.

"It is correct that the forecast for Spain is showing a gap of over one percent compared to its deficit target this year of 5.3 percent, but this based on a no-policy-change assumption," Rehn explained during the press conference.

Regional governments in Spain - responsible for a large chunk of the overall budget - are to submit their plans mid-May, while the cabinet in Madrid on Friday was debating a banking reform following the acquisition of a majority stake in one of its largest troubled banks.

"We have full confidence the Spanish government will meet the fiscal targets. It is very important for restoring confidence and growth," Rehn said when asked whether Madrid could get one extra year to meet the three-percent deficit target it is supposed to reach in 2013.

As for Greece, where the pro-bail-out parties have lost their majority in the parliament following last week's elections, Rehn said it still faced "substantial challenges, not least to form a government soon" - as parties were struggling for a last-ditch attempt to form a coalition and avoid another round of elections.

Rehn said Athens had created its problems before the first bail-out, in 2010.

"For the past decade, Greece was systematically living beyond its means. When 15 out of 100 euros for public expenditure was borrowed from foreign and domestic lenders, it is not sustainable," he said on whether the conditions attached to the EU-IMF bailout are responsible for the country's acute social problems.

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