EU economic growth is coming to a 'stand-still'

The expectations for the second half of the year have been ratcheted down "considerably" - by half a percentage point - from the bloc’s spring forecast.

The situation looks better from a full-year perspective, where a positive first quarter will see the EU economy grow 1.7 percent and the eurozone 1.6 percent in 2011 as a whole.

Unlike the fully-fledged spring and autumn reports, Thursday's interim report assesses only the performance of the seven largest EU economies. The figures in the interim paper point to downward revisions across all seven, meaning there is a "common factor" dragging the economies down.

The two best performers, Germany and Poland, will see overall 2011 growth of 2.9 percent and 4.0 percent, respectively. The two worst, Spain and Italy, are to see just 0.8 percent and 0.7 percent.

The two engines of growth, exports and domestic demand, are in trouble: net exports are becoming "less dynamic" the paper fears, while demand will be weakened in the second half of the year "and possibly beyond".

The report places the blame for the downward revision on "a more extensive weakening of global demand and world trade". The recovery "lost steam" in the US, the report said, while indicators for world trade suggest a further weakening in the third quarter. The EU study also pointed to a decline in financial market conditions "on the back of contagion of the sovereign debt concerns in the euro area" and concerns over the US.

"The outlook for the European economy has deteriorated. Recoveries from financial crises are often slow and bumpy", EU economy chief Olli Rehn said, announcing the results.

He added that a lot of austerity measures are still to kick in and when they do, the demand side of the equation will be hit even harder.

He called for EU countries to "steadfastly" stick to the existing strategy, however, saying: "To get the recovery back on track, it is crucial to safeguard financial stability and put budgets on a path that is sustainable beyond doubt".

Asked whether other strategies, involving fiscal stimulus, might be considered, he argued that high levels of public spending caused the market turbulence in the first place.

"Due to the still elevated levels of public debt and the related stress in financial markets, which is now leading to deterioration of economic growth, it has already had a very negative impact on economic recovery and sustainable growth", he said.

Mentioning Spain, he added: "Considering the stress of health of public finances, it would certainly be counterproductive to engage with fiscal stimulus at this juncture".

Slight change in language

The economy chief's message contained a slight nuance compared to previous statements.

Rehn is now calling for a "differentiated" austerity strategy, meaning that core eurozone countries like Germany which are under less pressure from markets, should not cut back any more on welfare programmes, unemployment payments and other forms of social assistance.

The slight change in message from the previous one of pure austerity first appeared in the commissioner’s language on Tuesday.