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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Spring Forecast: slowly recovering from a protracted recession
Press Conference on the Spring Economic Forecast
3 May 2013
Let me start with a remark on forecasting and policy-making. Following the reform of EU economic governance, the Commission's economic forecasts have increasingly become as analytical and operational instruments for economic and fiscal policy-making.
Accordingly, based on the fiscal data of last year, validated by Eurostat in April, the spring forecast is the basis for our assessment of the Stability and Convergence Programmes, which we have received from the Member States. Together with the assessment of the structural reforms that Member States are presenting and planning in their National Reform Programmes, the Commission will conclude the present third European Semester of economic policy coordination on our behalf by putting forward a comprehensive set of country-specific recommendations on 29 May.
Today, I will first present the projected economic outlook, and then focus on its implications for economic and fiscal policy in Europe.
External demand is projected to support the gradual recovery of the EU economy. The gradual improvement of the global economic outlook began in the first quarter of this year.
Among the major advanced economies, the underlying economic dynamics in the US are expected to remain intact despite the fiscal tightening because of the so-called sequester.
The emerging economies are expected to continue on a robust growth path. However, differences across regions have recently increased, with a robust economic expansion in Asia and more moderate growth in Latin America and Russia.
The recession in the EU deepened at the end of last year, with GDP contracting by some ½% in the last quarter of last year, compared to the previous quarter. For 2012 as a whole, economic activity decreased by 0.3% in the EU and by 0.6% in the euro area.
We expect the EU economy to stabilise in the first half of this year. GDP growth is projected to turn positive in the second half of this year, and to gain momentum next year, in 2014. In the near term, increasing external demand is set to be the main growth driver, since domestic demand is still constrained in the aftermath of the deep financial crisis.
Annual GDP this year is now forecast to contract by 0.1% in the EU and by 0.4% in the euro area. For 2014, we expect growth of 1.4% in the EU and 1.2% in the euro area.
Inflation continues to decline and it fell below 2% in the first quarter of this year, on the back of falling energy prices. In the euro area, inflation fell to 1.2% this April compared to April last year, which was an unexpectedly large decline after the cut-off date of our forecast. In any event, inflation risks remain firmly contained during the forecast period.
For labour markets, we do not unfortunately yet see a trend reversal this year, as the labour market usually follow economic activity only with a lag. Unemployment is forecast at 11.1% in the EU and at 12.2% in the euro area this year.
At the same time, disparities across member states remain large. In Spain and Greece unemployment rates are at an unbearably high level of 27% this year, and expected to fall slightly next. At the same time, unemployment in Austria is 4.7% and in Germany 5.4%.
With the economic recovery gaining ground, we expect a reversal of the trend and a modest rise in employment in 2014
Financial-market conditions have continued to improve since the second half of last year, and for some countries, like Ireland, even earlier. EU sovereign yield spreads have remained by and large unchanged since the start of the year.
That is good news, but at the same time the improvements in financial markets are not yet felt in the real economy through increased lending to the private sector. In fact, credit to non-financial corporations has continued to contract over the past few months, while credit to households has grown at a very low rate.
The most recent ECB bank lending survey shows that there has been less net tightening in lending conditions recently. This suggests that the ECB's interventions have had a stabilising effect. But growth in lending continues to suffer from the geographical divergence in financing conditions of companies across Member States in Europe, which reflects financial fragmentation.
In parallel to the cross-country divergence in bank lending rates, the spreads between interest rates on small compared to larger loans to enterprises have also increased since end-2011. The largest divergence between SMEs and larger corporations can be observed in Spain and Italy. This is particularly worrisome, since small and medium-sized enterprises usually do not have alternative access to capital markets and we would need SMEs to grow and create jobs in Europe and they need lending for that.
Public debt will continue to grow over the forecast period, although at a slower pace, reaching 96% of GDP in the euro area EU and almost 91% of GDP in the EU in 2014. This is in fact an increase of close to 30 percentage points since before the financial crisis.
In some countries, this increase in public debt reflects less than prudent fiscal policy in the years before the crisis. In other countries, it reflects an unsustainable build-up of private debt, which led to financial and banking crises. In both cases, the re-pricing of risk and the increased costs of debt service has increased the pressures to reduce debt.
Europe is moving on with the necessary fiscal consolidation, starting from a deficit of above 6% of GDP in 2010. We expect the headline deficit to fall to 3.4% in the EU and 2.9% in the euro area in this year.
In the euro area, this reflects a fiscal consolidation effort of about 1½% of GDP last year. On the basis of 2013 national budgets, we expect consolidation measures of about ¾% of GDP in the EU and the euro area, which means that this year in relative terms, half the amount of fiscal consolidation than last year (form 1½ to ¾ % of GDP). The decisions on which these budgets are based were made in 2012, in line with the Commission’s recommendations of last spring a year ago.
Why is this slowing down of fiscal consolidation possible? It has been made made possible by three factors:
• first, the increased credibility of fiscal policy which the euro area member states have achieved since 2011;
• which, second, has reduced macro-financial risks and enabled the ECB to take further decisive action to stabilise the markets;
• and third, the reform of EU economic governance, which now provides an effective medium-term framework for a gradual fiscal adjustment and the advancement of structural reforms.
Against this backdrop, I can share with you a few observations on some Member States as regards bringing their public finances on a sustainable path and meeting their commitments under the Excessive Deficit Procedure, or EDP.
Let me begin with those countries for which an abrogation, or exit, from the EDP is probable and/or possible.
Latvia and Romania have both reduced their deficits below 3% in 2012 and they stay below the reference value also during the forecast period. Both countries therefore seem to be firmly on track for a sustainable correction of their excessive deficit, and thus for an exit from the EDP.
Lithuania’s 2012 deficit is close to the 3% reference value. Since its debt remains below 60% of GDP, it would be eligible for the rule that takes into account the net cost of a systemic pension reform. Therefore Lithuania could be a candidate for abrogation.
Italy reduced its deficit from 3.8% to 3.0% of GDP in 2012. For this year, the deficit is forecast to stay below 3% of GDP, which facilitates exiting the EDP, subject to the continued commitment to sound public finances. The consolidation in structural terms amounted to about 3% of GDP between 2011 and 2013, which brings Italy close to its medium-term objective of a balanced budget. Balancing the budget in structural terms is important in view of Italy’s very high level of public debt.
The abrogation from the EDP will require that the deficit stays below 3% of GDP this year and beyond, taking into account measures that the new government intends to take. In parallel, a broad-based structural reform agenda is essential to reverse the deep-rooted and long decline in Italy’s competitiveness and thus boost its export performance.
I have been in contact with Minister Saccomanni and I look forward to receiving the concrete details in the updated Stability Programme ,expected in the next weeks.
Hungary has kept the deficit well below 3% of GDP in 2012, but would exceed the 3% threshold slightly again in 2013 and 2014. By taking new measures the government can ensure that the deficit will remain clearly below 3% of GDP this year and next.
Overall, out of the 20 countries currently in EDP, we could thus have three evident candidates, Latvia, Romania and Lithuania, for abrogation or exit from the EDP. Moreover, two member states, Italy and Hungary, can do it, provided that they stay the course of fiscal sustainability.
Let me now turn to member states that may require and qualify for an extension of the deadline for correcting their excessive deficit.
As I implied already, given the fragility of the expected recovery, we recommend a fiscal stance that is appropriate for the economic recovery at national and European level. This means a consistent but gradual consolidation in a number of countries, based on the gained credibility and progressive stabilisation. It should reflect national fiscal space and growth prospects and ensure a composition of adjustment that is supportive of growth.
In France, the recovery is now expected to be delayed, which evidently has repercussions on public finances as well.
We now project the deficit at 3.9% of GDP this year and at 4.2% next year. This is clearly higher than in the Stability programme of France, because their growth forecast is, in our view, overly optimistic.
Therefore, in order to bring the deficit below 3% next year 2014, as envisaged by the French authorities, significantly larger and front-loaded effort of fiscal consolidation would be required than is currently planned.
Considering the economic situation, it may be reasonable to extend the deadline by two years and to correct the excessive deficit at the latest by 2015 in France. In any case, it is essential that France fully implements the envisaged measures and soon specifies further actions to meet the objectives in fiscal policy.
Underlying our growth forecast is the persistent deterioration of French competitiveness. Therefore a credible medium-term fiscal strategy needs to be complemented with substantial structural reforms in the labour market, pension system and opening up markets. That is key to unlock the growth potential that France so badly needs and to unlock improving employment that France so badly needs.
In Spain, the aftermath of the credit boom is weighing heavily on the economy and employment, and on the Spanish people. With the view of the worse economic outlook and thanks to the credible medium-term fiscal strategy, we have advised the Spanish government to extend the timeline to correct the excessive deficit by two years, from 2014 to 2016.
An extension of the deadline by two years would still imply a significant but realistic consolidation effort. Moreover, given the size and urgency of the adjustment challenge, I welcome Spain's determination to firmly embed the budgetary strategy in profound structural reforms to enable a return to sustainable growth and improving employment.
In Slovenia, bringing the deficit below 3% of GDP now seems out of reach, as measures to support the banking system strain public finances.
Extending the deadline for the correction of Slovenia’s excessive deficit can be considered, but will have to be embedded in a broad based reform strategy, addressing the country’s imbalances.
For the Netherlands, the deficit is also forecast to exceed 3% of GDP this year, related to the nationalisation of a bank-insurance company and to a macroeconomic situation that is worse than expected. This would allow a revised recommendation to bring the deficit below 3% next year.
In Poland, the 2012 deficit was 3.9% of GDP, which is obviously too high to be eligible for the special rule regarding the net cost of a systemic pension reform. It seems that the recommended fiscal effort was made, but the deficit will still remain around 4% of GDP over the forecast period. This will necessitate a revised recommendation under the EDP.
I regret I have to be quite long, but that is part and parcel of the reformed economic governance and I can be somewhat briefer at the end of May when I present the country specific recommendations. Before taking your questions, let me conclude. While the short-term outlook is still weak, the rebalancing of the European economy is proceeding and underway. The current account imbalances are being reduced in the euro area and its current account is moving into surplus which helps rebalancing. It is important that the rebalancing continues in all member states: deficit countries will need to boost their competitiveness, while surplus countries will need to remove structural obstacles to the growth of their domestic demand.
In view of the protracted recession and high unemployment in many parts of Europe, we must really do whatever it takes to overcome the unemployment crisis. Each EU institution will need to work within its own mandate, each Member State both on its own challenges and jointly together as a Union on our common challenges.
The EU's policy mix is focused on sustainable growth and job creation. Monetary policy is accommodative and will remain so, as we heard yesterday in Bratislava. In fiscal policy, consistent consolidation is continued, even though with a slower pace in the current economic context, while ensuring the medium-term sustainability of public finances.
Next, we must resolve the current liquidity trap, or the financing trap of households and enterprises, especially in southern Europe, in order to let credit flow and facilitate economic growth by using possible ways and means at the disposal of the EU institutions, including the European Investment Bank. We are working on this with our partners and I trust operational measures can be agreed soon. In parallel, rapid progress on the banking union is necessary to reinforce confidence.
Structural reforms need to be pursued ever more intensively, and active labour market policies are likewise crucial, especially in combatting youth unemployment.
Thank you for your attention.