The eurozone's recession will be even deeper than previously feared this year, the European commission has warned, as it slashed its outlook for crisis-stricken Cyprus and downgraded the prospects of the bloc's biggest economies.
The EU's executive arm now expects GDP in the single currency zone to shrink by 0.4% in 2013, a sharper decline than its previous forecast for a drop of 0.3%. The recovery pencilled in for 2014 will also be slower than expected and the unemployment crisis in the eurozone will persist, the commission said in its spring forecasts.
Painting a picture of subdued domestic demand and lacklustre investment, the commission slackened its deficit-cutting targets to help some countries focus more on jobs and growth. Speaking against the backdrop of record high eurozone unemployment, the economic and monetary affairs commissioner, Olli Rehn, said the commission was now prepared to give France and Spain two more years to get their deficits below 3% of GDP.
"France badly needs to unlock its growth potential and create jobs," he said, warning that the pace of economic activity in the eurozone was too slow to cut unemployment.
With that in mind, he gave France and Spain greater leeway. "For France and Spain it is very obvious that it is more reasonable to have a correction of the excessive deficit over another two years," Rehn said.
Germany will be the only one of the area's five largest economies to escape recession this year and even its prospects were downgraded to growth of 0.4% from 0.5%. France, Spain, Italy and the Netherlands are all expected to shrink.
The sharpest revision was reserved for Cyprus, which the commission now sees contracting by 8.7% this year, from a 3.5% drop forecast in the commission's winter outlook in February – before the island was forced into a bailout led by the International Monetary Fund, the European Central Bank and the EU. Unemployment on the troubled Mediterranean island is expected to be 15.5% this year and rise even further to 16.9% next year.
"Reduced business activity, possible spillovers from the restructuring of the banking sector to professional business services and the hiring freeze in the public sector are expected to push the unemployment rate higher in 2013 and more so in 2014," the commission said in its report, referring to the consequences of a bailout that included a raid on savers' deposits.
The spring forecasts underlined the stark contrasts between eurozone member states, with France becoming decoupled from Germany as the economic centre of the single currency bloc. The commission sees the German economy recovering gradually on the back of improving domestic demand, helped by a "robust labour market and more dynamic wage growth". GDP in France, however, is forecast to stagnate this year amid modest exports.
Eslewhere among the eurozone's largest economies, GDP in Italy is set to decline again in 2013, as reduced disposable incomes, low confidence and difficult financing conditions continue to weigh on consumption and investment. In Spain, the correction of pre-crisis imbalances "remains a strong drag on domestic demand" and the Netherlands is expected to shrink as the housing market and low disposable income hit consumption.
The forecast of a 0.1% contraction in GDP for France contrasts with the government's own prediction of growth of 0.1%. The commission expects that the gloomy prospects for France mean it will run a deficit of of 3.9% of GDP in 2013, and 4.2% in 2014. Rehn said Paris was "overly optimistic" on growth as he granted an extension on the deadline originally set for this year to get the budget deficit under 3%. France said it would meet that target by 2014.
The increased headroom for France and Spain will be welcomed by politicians and campaign groups pushing for a moveaway from austerity towards stimulating growth and employment.
The commission's spring forecasts touched on the risks of failing to drive down unemployment, which it sees hitting 12.2% in the eurozone this year, up from 11.4% in 2012.
"While the risks to the economic outlook have become more balanced on the back of important policy decisions since last summer, downside risks remain predominant. Very high levels of unemployment in some member states could affect social cohesion and become persistent if further reforms are not undertaken," it said.
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