EU predicts economy to contract 0.3%

11 May 2012, 8:41 pm   -   Source: AAP

With 17 countries in recession, the European Union predicts the eurozone economy will contract 0.3 per cent this year.

The European Union estimates that the economy of the 17 countries that use the euro is in recession in the wake of a debt crisis that has prompted savage spending cuts and a jump in unemployment to record highs.

The European Commission, the executive arm of the EU, forecasts that the eurozone economy will contract by 0.3 per cent in 2012 and grow by 1 per cent next year. Its prediction for 2012 is far weaker than the one it gave last November, when it predicted growth of 0.5 per cent. A year ago it was predicting growth of 1.8 per cent.

Friday's forecasts provide clear evidence of the impact of Europe's debt crisis on the eurozone economy over the past year as governments have struggled to introduce deficit-reduction measures and business and consumer confidence has taken a dive.

Olli Rehn, the EU's monetary affairs chief, said the recession is likely to be "mild" and "short-lived".

A recession is commonly defined as two consecutive quarters of negative growth and figures next week are expected to show that the eurozone contracted by a quarterly rate of 0.2 per cent for the second quarter running.

Rehn insisted a "recovery is in sight" but urged member countries not to give up on their efforts to get their public finances back into shape. However, he did indicate that more could be done to give growth a boost.

"Sound public finances are the condition for lasting growth, and building on the new strong framework for economic governance, we must support the adjustment by accelerating stability and growth-enhancing policies," said Rehn.

How to get the faltering eurozone economy growing again has become the hot topic in European policymaking circles over the past few weeks. Sunday's presidential election victory by Francois Hollande was due in large part to his promotion of the need for a greater focus on growth in Europe. So far, austerity measures, such as cuts to wages and pensions as well as tax rises, have been the main policy response to too much government debt in a number of eurozone countries.

In Greece, the epicentre of Europe's debt crisis, elections on Sunday illustrated the level of anger against the austerity that's been imposed on the country. Greece is in its fifth year of unemployment and has record-high unemployment with more than one of two young people out of work.

The Commission laid out the prospect of another grim year ahead. It's forecasting a 4.7 per cent economic contraction in Greece to follow 2011's 6.9 per cent. However, it said the Greek economy should flatline after that on the assumption of unchanged policies.

With a second round of elections appearing likely in Greece next month, there are concerns that the country may not meet its commitments to international creditors and that its bailout may be halted, putting its future in the euro under severe threat.

Greece has enacted a raft of austerity measures over the past few years in the hope of getting a handle on its borrowings. Some progress is being made on the public finances front but the country is still in a parlous situation.

The Commission predicts that the Greek budget deficit will narrow to 7.3 per cent of national income this year. Though down from last year's 9.1 per cent, the level of borrowing is still double the 3 per cent limit that was supposedly enshrined in euro membership.

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