EU: Keine Erholung der Wirtschaft vor Mitte 2010[en] 

The euro zone officially entered recession in November last year, recording a decline in GDP for the second consecutive quarter (EurActiv 14/11/08).

The European Central Bank and the Bank of England cut interest rates to an all-time low on 5 March, signalling that further easing was possible as ECB staff forecast that the eurozone economy could shrink by more than three percent this year (EurActiv 6/03/09). The ECB is widely expected to cut rates further during a meeting this week, reaching a new all-time low of one percent. 

Last week, the European Restructuring Monitor (ERM), published by Eurofound, found that job losses had outnumbered job creation by almost three to one. 220,000 job losses were recorded by the ERM – the highest since it began to collect statistics in 2002 – with just 90,000 jobs created (EurActiv 4/05/09).

Despite what it called positive signals, the EU executive said the euro currency zone's economy would shrink 4.0 percent this year and 0.1 percent next year, with its overall public deficit tripling by 2010 to 6.5 percent of GDP.

"The European economy is in the midst of its deepest and most widespread recession in the post-war era," Economic and Monetary Affairs Commissioner Joaquin Almunia said.

Eurozone finance ministers, or the Eurogroup, meeting for monthly policy talks with the European Central Bank in Brussels, broadly backed the Commission's forecasts.

"Everybody agrees that we are now in the worst period of the recession, but at the same time, we observe positive signals," Almunia said later, adding that the positive signals he had seen in the past week were the first since mid-2007.

The slowdown has increased unemployment, caused street protests and brought down some governments in the 27-nation EU, and Eurogroup chairman Jean-Claude Juncker said he feared there would be more social problems if unemployment keeps rising.

The Commission forecast unemployment would reach 11.5 percent of the workforce in 2010.

"We are heading towards a social crisis because there will be an unemployment crisis in the light of all this. I urge employers not to fire people prematurely, I urge them to show responsibility," Juncker said.

But Almunia noted financial markets were healthier and business expectations indices had improved.

European Central Bank Vice President Lucas Papademos also saw signs the economy was stabilising.

"The pace of economic deterioration [...] is slowing," he said. His comments come before a meeting on Thursday at which the ECB is expected to cut its main refinancing rate by 25 basis points to 1 percent and announce other ways of monetary policy easing.

Sharp downward revision

The Commission's growth forecasts were a sharp downward revision of 19 January projections of a 1.9 percent contraction this year and 0.4 percent growth in 2010, a scenario that would have implied an earlier start to the recovery.

But Almunia said that for the mid-2010 recovery to happen, Europe had first to deal with toxic assets in banks that were choking off lending to the credit-starved economy.

"Member states have started tackling bad assets, but more needs to be done," he said. His views were echoed by Papademos and Finnish Finance Minister Jyrki Katainen.

The forecasts were released one month before a European Parliament election in which national governments fear voters will show their dissatisfaction with efforts to combat the global economic crisis, despite large stimulus packages.

They followed data showing eurozone manufacturing activity declining at its slowest pace in six months in April, with signs across its four leading economies that the worst of a severe recession may be over.

Almunia said that were it not for welfare spending and other fiscal stimulus from EU governments amounting to five percent of the bloc's GDP in 2009-2010, the economic contraction this year would be five percent rather than four percent.

"We are no longer in a free-fall," he said, adding EU leaders would discuss at their June summit whether further action was needed.

Eastern economies also hit

All of the EU's eastern members will also fall into recession this year, the Commission said, forecasting economic contractions of more than 10 percent in the worst-hit Baltic states. 

The region's biggest economy, Poland, would shrink 1.4 percent, a sharp contrast to Warsaw's own forecasts of modest growth.

Among 10 ex-communist countries that joined the EU in 2004 and 2007, the Czech Republic and Bulgaria are also forecast to experience a relatively small contraction, compared with the euro zone's expected 4.0 percent this year.

"Compared with other countries in the region, this is a relatively mild recession thanks, among other factors, to the lower share of trade in GDP," the Commission said of Poland, which accounts for about half of the region's output.

The estimates came as forward-looking data from April showed a dramatic manufacturing decline in the Czech Republic and Hungary slowed, suggesting their shrinking economies could be approaching a bottom. But the figures showed Poland worsening.

No mood for more spending

Juncker said there was no appetite for more spending now. "We all agreed the fiscal efforts launched by the countries in the euro zone should be seen as sufficient for the time being," he said. "We have to first assess the success of packages under way and then we will see."

Papademos said governments were right to use stimulus measures to try to stop growth falling but would eventually have to rein in what was becoming a "serious fiscal deterioration" in a credible "exit strategy".

The forecasts coincided with data which showed manufacturing activity had grown in China and India in April, but Juncker said there was not yet a true recovery in Europe.

Economists said ballooning EU budget gaps, the majority of which will be above the bloc's ceiling of three percent of GDP this year and next, were a challenge for governments.

"The question is whether governments will really, in two or three years time, commit themselves to fiscal consolidation," said Carsten Brzeski, a senior economist at ING in Brussels.

The Commission also forecast eurozone inflation far below the ECB's target of below, but close to two percent this year and next, but said there was no risk of deflation.

(EurActiv with Reuters.)