EU to plunge deeper into recession than US, Brussels says (Roundup)

Jan 19, 2009, 12:16 GMT

Brussels - The European economy is facing its annus horribilis, with 2009 Gross Domestic Product (GDP) set to contract more than in the United States, according to worse-than-expected European Commission forecasts published on Monday.

The European Union's executive predicts that economic activity will this year shrink by 1.9 per cent in the 16-strong eurozone and by 1.8 per cent in the 27-member EU.

This compares with a predicted GDP fall in the US of 1.6 per cent in 2009 and positive growth of 1.7 per cent next year.

'The risks we identified in November have largely materialized, impacting on the real economy, not only financial markets,' EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

The EU economy is only expected to start growing again during the latter half of the year, leading to an estimated rate of about half a percentage point in 2010.

Even this prediction will only hold if financial markets start working again and if governments stick to a 'rapid and effective' implementation of their national stimulus packages, Almunia said.

As late as in November, the commission predicted EU growth of 0.2 per cent in 2009 and 1.1 per cent in 2010.

But the rapid slump in European economic activity forced the commission to publish updated figures ahead of its regular spring forecast.

In December, EU governments endorsed commission proposals for the launch of an unprecedented economic recovery plan worth a combined 200 billion euros (266 billion dollars), or 1.5 per cent of EU GDP, in public spending and other fiscal stimuli.

Measures announced so far by national governments for 2009 amount to 130 billion euros, or about 1 per cent of the bloc's annual GDP figure, Almunia said.

The total includes Germany's latest additional package worth 50 billion euros.

'Our response is balanced and adequate,' said Almunia.

The country-by-country breakdown sees Germany - Europe's economic locomotive - set to experience its worst downturn in more than 60 years, with GDP predicted to fall by 2.3 per cent year-on-year as the global economic slowdown hits the country's all-important export sector.

The EU's other heavyweights - France, Britain and Italy - are also bracing themselves for a painful year, with GDP set to shrink by 1.8, 2.8 and 2.0 per cent respectively.

Within the euro area, Spain and Portugal are not expected to experience a recovery until 2011.

And the bloc's one-time hottest economic performers, Ireland and the Baltic States, face a shattering turn-around as the double-digit growth of recent years turns to the deepest recession in Europe.

Ireland's economy is set to contract by 5 per cent, while Latvia's is due to shrink by 6.9 per cent, the worst rate since the collapse of the Soviet economy in the early 1990s.

The downturn is likely to push unemployment levels to their highest in a decade, with the EU-wide figure set to hit 9.5 per cent by 2010. Average EU unemployment was just 7.0 per cent in 2008.

Meanwhile, the combination of emergency extra public spending and falling tax revenues will push two-thirds of EU governments to break the bloc's iron rule that their budget deficits should not exceed 3 per cent of GDP.

Of the EU's six biggest members, only Germany looks set to keep just within the bloc's budgetary rules, with a deficit of 2.9 per cent of GDP in 2009.

By contrast, budget deficits are set to hit 5.4 per cent in France, 3.8 per cent in Italy, 6.2 per cent in Spain and 8.8 per cent in non-euro member Britain.

While promising 'flexibility' in applying the rules, Almunia said the commission would discuss whether to open excessive deficit procedures against the worst offenders on February 18.

And despite widening spreads on the interest rates paid by different governments to finance their soaring debts, the commissioner played down any talk of the eurozone breaking down.

'I don't believe that the euro area will split,' he said.

At the same time, Almunia confirmed that there was growing talk among eurozone governments of issuing so-called 'euro-bonds' to bankroll public spending.

The only good news from Monday's forecasts came from consumer prices, which in the euro area are set to fall from 3.3 per cent in 2008 to 1 per cent this year on the back of falling commodity prices.