Spain and France are set to fall short of their
deficit targets in the coming years, while debt levels in Italy and
Greece continue to cause concern, the European Union warned Wednesday
- sending financial markets and the euro into a nosedive.
"Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time," EU Economy Commissioner Olli Rehn said as he presented the autumn economic forecast of the European Commission.
He insisted that the continent should continue with its strategy "to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth."
The approach has not helped boost short-term growth - the commission expects the gross domestic product (GDP) to contract by 0.4 per cent in the eurozone and by 0.3 in the EU this year - but Rehn argued that restoring lasting confidence in Europe is as important.
The EU has failed to squelch speculation that Spain, the eurozone's fourth largest economy, will be next in line to need outside help because of financial woes.
The EU wants Madrid to lower its deficit from 6.3 per cent of GDP this year to 2.8 per cent in 2014. But the commission now expects it to reach 8 per cent this year, 6 per cent in 2013 and then go back up to 6.4 per cent in 2014 if there are no new austerity policies.
"Fiscal consolidation hardly advanced in the first eight months of 2012," the commission said. "Planned expenditure cuts seem to be on track, but broad-based revenue shortfalls, higher interest payments and rising social transfers almost offset these improvements."
The commission also expects the Spanish economy to contract by 1.4 per cent next year and its unemployment rate to surpass 26 per cent.
Spanish authorities nevertheless maintained an upbeat tone on Wednesday, with Finance Ministry sources saying that they were sticking with a forecast of 7.3 per cent for this year - the 6.3 per cent goal, plus a 1-per-cent leniency due to bank recapitalizations.
And even if the deficit were to reach 8 per cent, it would not be that far off the target, the sources added.
Rehn also struck a conciliatory tone, saying that the commission would look not just at whether Spain has met its deficit targets, but also whether its "structural fiscal effort" has been "effective."
All EU member states are mandated to gradually trim their deficits down to 3 per cent, although they can be granted some leniency if there are adverse economic conditions.
France has been tasked with achieving the goal next year, which led new President Francois Hollande to present what he called the toughest budget in 30 years.
Finance Minister Pierre Moscovici insisted as late as Tuesday that the 3-per-cent target would be met, based in part on the assumption that GDP will grow by 0.8 per cent next year.
But the commission rejected both assumptions, predicting that the deficit would only go down to 3.5 per cent and growth would reach only 0.4 per cent.
"After three quarters of stagnating GDP and historically low levels of corporate profitability, prospects for an imminent recovery have waned," the commission said, noting too that its economic scenarios are "less benign" than those used in Paris.
Rehn also sounded the alarm on Greece and Italy, two other countries at the center of eurozone crisis jitters.
Greece's debt mountain is now expected to reach almost 190 per cent of GDP by 2014, even though its international creditors expect it to be at 120 per cent by 2020.
"There is no denying that (the debt burden) is increasingly unsustainable without further measures of reducing this debt burden," Rehn said, noting that eurozone finance ministers should be presented with a new analysis of Greece's debt sustainability by Monday.
Italy, the eurozone's third-largest economy, has the second highest debt burden in the EU. The commission expects it to reach 126.5 per cent this year and increase to 127.6 per cent in 2013.
"This is a source of concern, especially against the background of Italy's slow growth prospects," Rehn said, thus calling on Rome to "pursue its efforts of fiscal consolidation."
The only bright spots in the forecast were Baltic countries - which Rehn said now have the "fastest growing economies" in the EU - and Malta, which the commissioner said had made enough progress to merit being removed from the bloc's excessive deficit procedure.
Economic powerhouse Germany is expected to see its GDP steadily grow further, by 0.8 per cent next year and 2 per cent in 2014.
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