By Chris Jones - 7th May 2006
The EU economy will bounce back in 2006 after a poor performance in 2005, but will start to slow again in 2007, the European commission has warned.
“GDP growth is accelerating, but it will slow again next year,” said monetary affairs commissioner Joaquín Almunia, announcing the first of two predictions of European economic growth in 2006.
EU economic growth is expected to be 2.3 per cent this year, up from 1.6 per cent in 2005 and 0.2 per cent more than the commission predicted in November.
Growth in the 12-country eurozone will be 2.1 per cent, Almunia said, compared to 1.3 per cent in 2005.
The growth is being fuelled by increased investment, in both equipment and infrastructure, and by an upturn in consumption.
This, in turn, was helped by higher levels of employment and stable price inflation – which has remained unaffected so far by increasing oil prices over the last year.
But Almunia warned that 2007 would see a downturn once again, with EU growth predicted to fall slightly to 2.2 per cent.
Germany, the EU and eurozone’s biggest economy, is the main driver of both this year’s upturn and next year’s decline, the Spanish commissioner said.
An improvement in the German economy – where growth should improve from 0.9 per cent in 2005 to 1.7 per cent this year – will lift the European economy as a whole.
But a series of budgetary reforms, including a 3 per cent increase in VAT, planned for January 1 2007 lead to a temporary relapse, with German growth sliding to 1 per cent next year, as investment is shifted to the final quarter of 2006 ahead of the increase in rates.
But Almunia said that the so-called German “package” would not have any effect – positive or negative – on European growth over a two-year period.
Despite the upbeat assessment of Europe’s economy, there are still several causes for concern.
Half-way through the EU’s 10-year programme for jobs and growth, unemployment remains high – at around 8 per cent – and the 3.6 million new jobs expected to be created in 2006-07 will only go part way towards reducing the deficit.
Almunia said that most European member states were not taking sufficient advantage of the current growth to step up their economic reforms to help boost employment.
“Europe must pursue the path of reforms, correct budgetary imbalances where they exist and make room for expenditure on R&D, innovation and education where it is most needed.”
“Only in this way will the unemployment rate come down more,” he said.
The commissioner also highlighted ongoing problems with public deficits in a number of EU countries.
“Germany, Ireland, the Netherlands and Spain have all improved their deficits, but there is still a lot of work to do for countries such as Italy, Portugal and especially Hungary,” Almunia said.
Hungary is the EU’s worst offender in terms of budget deficit, with debts of 6.7 per cent of GDP for 2006, well ahead of the upper limit of 3 per cent set by the commission’s stability and growth pact.
The situation is expected to worsen to 7 per cent in 2007 because of Budapest’s failure to begin much-needed reforms.
The commission’s figures will also make for uneasy reading for a number of national governments whose deficits are hovering around the 3 per cent ceiling.
France, for example, is predicting a deficit of 2.8 per cent for 2006, but the commission’s estimate is nearer 3 per cent, rising to 3.1 per cent in 2007 – putting Paris back in breach of the pact.
Almunia also refused to be drawn on whether other countries currently in breach – such as Germany – would be let off the hook as their performance improves.
Almunia is predicting German deficits of 3.1 per cent in 2006 and 2.5 per cent in 2007, but said that a clearer picture about the state of German finances would not be available until at least July, when the new Berlin government has unveiled its 2007 budget proposals.
The commission’s full economic forecast can be found here.
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