Brussels: EU economic growth spurt 'not likely to last'

EU economics chief Olli Rehn said: "The economic recovery has taken hold ... However, this recovery is uneven and many member states are going through a difficult period of adjustment."

However, a growth spurt seen in the second quarter of 2010 "was exceptional and not likely to last," said Marco Buti, the director general of the commission's economics department as a result of weak global demand and the disappearance of European stimulus.

Mr Buti described the pace of the recovery as "gradual and rather uneven across member states."

"The level of uncertainty for our outlook continues to be very high," he said, introducing the forecast. "In particular, the risks to the global economic environment seem tilted to the downside."

He said that as it was only as the forecast was going to print that the eurozone's sovereign debt crisis began to re-emerge.

"Indeed, a replay of the negative feedback loop [from the crisis] ... cannot be excluded," he continued, saying that if such a reality were indeed to materialise, this "would htrow a spanner in the wheels of recovery."

He added however that the bloc is not of the opinion that such a scenario is likely, thanks to Europe's bail-out mechanisms and a recovered "health of the European banking sector in autumn 2010," with improved capital ratios within banks, signs of normalisation in the money markets and lending to the private sector that has begun to pick up.

The forecast underscores that the global economy is set to go through a "temporary soft patch" in 2011, "dampening EU export growth."

"Despite brightening since the spring, the outlook remains for a rather jobless recovery and potentially persistent high unemployment ahead."

The major bright spot, the analysis said, was that the upturn such as it exists "is set to be ntoably strong in Germany," where econmic activity is expected to expand by 3.7 percent this year, more than double that of the euro area.

France is just below the area average, Italy half a percentage point lower and Spain due for continued recession.

Outside the euro area, Poland is the only EU economy to have escaped a recession last year, although UK recovery is expected to match only the moderate EU average. A rebound is strong however for Slovakia (4.1 percent) and Sweden (4.8%), with these two performers posting th highest growth rates in the bloc.

GDP is set to contract in Greece, Latvia, Romania, Bulgaria and Ireland.

The United States and France have consistently fretted about a lack of German domestic demand if there is to be a turn-around in Europe. In parts of the document, the authors are optimistic on this front, talking of a "gradual strengthening of domestic demand" in Germany while elsewhere of a "noticeable pick-up" the situation, as a result of overflow from a rising import content from German exports.

Asked by EUobserver about this point, a commission source said: "Actually, we are even a bit on the cautious side here. Many [German] corporations have put forward wage increases in the last year and we should also have a look at high level of private sector savings rates, which now has the possibility of coming down.

"There was also a decline in investment in equipment in 2009. So we should an increase there as well, given that we have some shortages in some sectors. We also see less outsourcing to Eastern Europe."

"It is however true that we are maybe a bit optimistic in terms of Germany's overall position as some of the major - although not all - major trading partners within the EU will have to cut back in terms of imports."

Economic homeopathy

Engelbert Stockhammer of the Vienna University of Business and Economics however said the commission's was "cynical" and "rather daring to call this rebalancing, given the size of the problem."

"This is an adjustment of sorts, but eyeballing the commission's forecasts, German's current account surplus goes down by about 0.2 percent of GDP per year," he said.

This would mean that it would take "a mere 25 years" for German surplusses to have disappeared.

"For this rebalancing to take place, the southern European countries will shrink by some five percent. Rebalancing now essentially means shrinking of the southern European economies. German wages would have to increase by, say, 5-7 percent per year, for, say, five years to make a real difference."

"You could describe the German domestic demand increase as 'homeopathic'," he joked. "Like those pills that people take that don't really do anything. There are a few vibrations, it's not really having any impact."