Eurozone set for slow recovery, deficits bite Spain, France

BRUSSELS, Belgium – The eurozone is heading for slow recovery from recession later this 2012 but Spain and France will miss deficit targets, the EU said on Friday, May 11, piling pressure on countries already facing budget cuts.

“A recovery is on the horizon, but it will be a long and stony road before the EU economy reaches sustained growth,” the European Commission said in its 2012 spring economic forecast.

European Union Economic Affairs Commissioner Olli Rehn said the 17-nation eurozone was currently in a “mild by short-lived recession” and would see a “slow and subdued recovery” at the start of the second half of the year.

Economic activity is estimated to have contracted in the first quarter of 2012 after shrinking at the end of last year, officially putting the eurozone in recession, the commission said.

The eurozone’s economy is forecast to shrink by 0.3% this year but grow by 1% in 2013. Unemployment will stay at a record high 11% this year and the next.

“A recovery is in sight, but the economic situation remains fragile, with still large disparities across member states,” he said, warning that low growth would endure unless the EU took “further determined action.”

The commission meanwhile delivered bad news to France’s incoming president Francois Hollande and to Spanish government efforts to prevent the country from needing a bailout like Greece, Portugal and Ireland.

Italy, by contrast, is “on track” to meet its deficit target, Rehn said, confirming a turnaround for a country that was facing market turmoil over its high debt late last year.

The French public deficit is expected to hit 4.2% in 2013, higher than Hollande’s 3% target, while the economy will grow by 1.3% next year, also below the Socialist leader’s projection of 1.7%.

Hollande defeated right-wing President Nicolas Sarkozy last Sunday, vowing to push for growth policies in an election marked by a voter backlash against the austerity creeping across Europe since the Greek debt crisis erupted in 2010.

In Paris, Michel Sapin, author of Hollande’s election manifesto, told AFP the Commission’s pessimism was based on the performance of Sarkozy’s government and the new team would do better than the EU forecast.

Facing “difficult times ahead,” Spain is forecast to be the only eurozone nation in recession in 2013, shrinking by 0.3% after contracting by 1.8% this year, the commission said.

Compounding Spain’s problems, the commission said the country’s public deficit would reach 6.4% this year, way off the government’s target, and 6.3% in 2013.

Spain was originally supposed to bring the deficit down to 4.4% this year, but Prime Minister Mariano Rajoy convinced EU partners to raise the target to 5.3% after it hit a worse-than-expected 8.5% last year.

Despite the higher figure, Rehn said the commission has “full confidence in the determination of the Spanish government” to meet the deficit target. He also said the figures did not take into account expected cuts by the country’s autonomous governments.

Rehn called at a news conference for “decisive action” to recapitalise Spain’s banks and curb “excessive spending” by the country’s regions.

“The message here is crystal clear: Spain would have to impose much more austerity, especially in 2013, in order to be able to make any chance of meeting the existing budget deficit targets,” said ING Bank analyst Martin van Vliet.

“However, this seems very difficult, to say the least, given the public backlash and the intolerably high unemployment,” he said, referring to Spain’s jobless rate of 24.4%.

The Spanish situation will figure high on the agenda at a meeting of eurozone finance ministers on Monday. – Agence France-Presse