The eurozone economy will shrink by a further 0.3 percent in 2013, the European Commission said Friday (22 February), revising down a more optimistic previous estimate that had predicted 0.1 percent growth for this year.
The data also indicates that average government debt rose by 5 percent in 2012 to 93.1 percent as a proportion of GDP. The average debt level is expected to peak at 95.2 percent in 2014, well above the 60 percent threshold set out in the bloc’s Stability and Growth Pact.
News on government budgetary positions was more positive. The average deficit in the eurozone had fallen by 1.5 percent to 3.5 percent, with the commission expecting a further 0.75 percent improvement to bring the eurozone average under the 3 percent threshold.
Announcing the figures, Economic Affairs Commissioner Olli Rehn admitted that “the hard data is still very disappointing” adding that the progress made by national governments to cut budget deficits was “not yet feeding into the real economy.”
But he added there was no alternative to austerity programs to balance budgets which he said was “paving the way for a return to recovery.”
“We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway,” he said.
However, he indicated that the Commission was prepared to push back deadlines on deficit reduction provided that “the recommended structural deficit adjustment has been delivered.”
Meanwhile, unemployment is set to rise to 12.2 percent by the end of 2013, before falling by 0.5 percent in 2014.
The projections will come as a serious blow to the EU, which has adopted economic governance legislation forcing national governments into deep public spending cuts and tax rises as part of tough fiscal consolidation programs.
Despite the continued recession, financial market pressure on the eurozone has eased in recent months. Sovereign bond spreads for the eurozone’s crisis countries have been gradually falling since autumn 2012, since the ECB’s decision to buy unlimited amount of bonds held by eurozone countries. The euro has gained around 10 percent in the currency markets.
The picture is bleakest in Spain, Greece, Cyprus and Portugal, all of which remain in a spiral of recession, high budget deficits and rising unemployment.
Spain’s budget deficit peaked at 10.2 percent in 2012, and will only shrink to 6.7 percent in 2013. For its part, the Greek economy will fall by 4.4 per cent – its sixth successive year of a recession that has seen output fall by over 25 percent.
The commission 2013 forecasts offer the most pessimistic view yet of the European economy. The IMF expects the eurozone economy to shrink by 0.2 per cent while the latest ECB forecasts peg growth between 0.3 per cent and 0.9 percent.