Euro Watch: European Commission Offers Grim Prediction for Economy

BRUSSELS — A top European Union official warned Friday that worse-than-expected growth last year and weak prospects for 2013 will lead countries like France to miss deficit-reduction targets designed to ensure the stability of the euro.

“The ongoing rebalancing of the European economy is continuing to weigh on growth in the short term,” Olli Rehn, the European commissioner for economic and monetary affairs, said, according to a prepared statement ahead of a news conference.

But Mr. Rehn insisted that Europe’s belt-tightening policies were working and would lay the groundwork for a recovery.

“We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation,” he said in the statement.

Mr. Rehn was presenting a so-called winter economic forecast that has taken on greater significance as his department at the European Commission, the Union’s administrative arm, gains greater responsibility for overseeing government budgets. In the coming months, Mr. Rehn must decide whether to recommend punishing countries for missing their targets, possibly leading to large fines, or to offer them leniency.

In a report, the commission forecast growth across the 27-nation European Union of just 0.1 percent in 2013 and a contraction of 0.3 percent in the 17-nation euro area over the same period. That downbeat assessment came a day after data showed a slump in business activity in the euro area worsened unexpectedly this month, especially in France.

Mr. Rehn said the economy should expand in 2014, with growth reaching 1.6 percent across the Union and 1.4 percent in the euro area.

One of the biggest test cases for Mr. Rehn will be France, the second largest economy in the euro area.

On Friday, the commission said low growth meant the French budget deficit was expected to be 3.7 percent of gross domestic product, down from an estimated 4.6 percent in 2012, but well above the government’s official target of 3 percent. The commission also warned that the deficit could rise again to 3.9 percent in 2014.

Jean-Marc Ayrault, the French prime minister, warned earlier this week that his government would need to seek leniency from the commission because the 3 percent target was still out of reach.

The commission said the French economy stagnated last year and that G.D.P. was projected to increase only by 0.1 percent in 2013. It attributed the stagnation on declining spending by households linked to rising unemployment — which was expected to reach 10.7 percent in 2013, from an estimated 10.3 percent in 2012, and 11 percent in 2014, according to the report — and to a drop in confidence among entrepreneurs.

In the case of Spain, the commission said tax increases and a slashing of year-end bonuses for public sector workers were responsible for a significant decline in the budget deficit, although that figure excluded the effects of spending to rescue the banking sector.

The commission estimated that the Spanish deficit would fall to 6.7 percent this year, down from 10.2 percent in 2012. But it warned that the deficit could rise again to 7.2 percent in 2014.

The European Union has vowed to show a new determination to enforce discipline after the failure to do so over the last decade was a factor in several debt crises that began with Greece and threatened to undermine the euro.

A “six pack” of rules approved in 2011 tightened E.U. scrutiny of national budgets and economic policies and introduced swift penalties for profligate states. Under rules agreed to this week, dubbed the “two pack,” the European Commission would gain new powers to request a redraft of euro states’ budget plans — although that would only apply as of the budget review procedure in 2014.

Europe’s insistence on austerity has been criticized by some economists who see it as creating a self-perpetuating cycle. As government spending is cut to meet deficit targets, they argue, overall demand is diminished, weakening tax revenue and further straining finances — even as the denominator of the deficit-to-G.D.P. equation shrinks.

Carsten Brzeski, a senior economist with ING in Belgium, said that Mr. Rehn was likely to be caught in coming months in a familiar bind between showing toughness and avoiding a political battle with a major member state like France over the wisdom of forcing more budget tightening in a downturn.

“The way forward will be a walk on a tightrope,” Mr. Brzeksi said. Mr. Rehn will need to weigh “strict application of the rules to regain credibility or softer, and for some smarter, application not to overburden the battered economies with additional austerity.”

David Jolly contributed reporting from Paris.

Article source: http://www.nytimes.com/2013/02/23/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss