EU Trims Forecast, Says 6 States Break Deficit Limits
EU Trims Forecast, Says 6 States Break Deficit Limits
April 7 (Bloomberg) -- The European Commission trimmed its economic growth forecast, said risks to the recovery are mounting and warned that six of the 12 countries using the euro will break budget-deficit rules in 2004. Germany, France, Italy, the Netherlands, Portugal and Greece -- representing 80 percent of the $8.5 trillion euro economy --will surpass the deficit limit of 3 percent of gross domestic product, the Brussels-based commission said in its semi-annual forecasts.
Governments are struggling to control their budget gaps after growth slowed to a 10-year low of 0.4 percent in 2003. The commission pared its forecast for 2004 to 1.7 percent from 1.8 percent and said ``the balance of risks appears to have shifted toward the downside in recent months.''
``We have to acknowledge the hard truth that the EU economy is not participating fully in the positive global economic performance,'' Monetary Affairs Commissioner Pedro Solbes told a news conference. He forecast U.S. growth of 4.2 percent in 2004, outstripping the euro region for the 11th out of 12 years. Japan's growth of 3.4 percent will beat Europe's for the second year, Solbes said.
With European interest rates at half-century lows, the commission said the European Central Bank's monetary policy is ``accommodative,'' indicating that there is little prospect of lower borrowing costs or increased government spending boosting the economy.
Interest Rates The ECB left its benchmark lending rate at 2 percent last week, saying borrowing costs are low enough to support a ``gradual'' recovery. The commission issued an ``early warning'' to Italy over its widening deficit, opened a probe of the Dutch deficit and said it will send a fact-finding mission to Athens to determine why the Greek deficit has gone awry. The U.K., not a member of the euro, also faces an investigation of its excessive deficit in 2003, though the commission said the U.K. will be in compliance in 2004.
While faster growth abroad has compensated for the rise in the euro, a further acceleration of the single currency could hurt exports, the commission said. The euro, which gained 13 percent in the last year against the dollar, has declined from a record high of $1.2930 on Feb. 18. It was trading at $1.2112 at 1:40 p.m. in Brussels.
Euro, Oil Assumptions In its forecasts, the commission assumed an average exchange rate of $1.25 in 2004 and $1.24 in 2005. The euro's rise has helped shield the economy
from higher oil prices, expected to average $31.10 per barrel of brent crude in 2004 and $28.90 in 2005, the commission said. A recovery in Germany's economy, Europe's biggest, showed mixed signals this week. Factory orders rose 0.3 percent in February, the Economics and Labor Ministry said today, the eighth increase in nine months.
German growth has been too muted to spur consumer spending or hiring. Unemployment posted the biggest increase in a year in March, the government said yesterday, pushing the jobless rate up to 10.4 percent. The commission pruned its forecast for German growth in 2004 to 1.5 percent from 1.6 percent. A further risk comes from consumers, whose confidence is being further undermined by terrorist threats after the Madrid attacks, the commission said. ECB President Jean-Claude Trichet has said the bank may have to cut its growth forecasts if consumer spending doesn't pick up.
Budget Busters Germany and France have been breaking the budget rules since 2002. They upset some smaller countries at a meeting of EU finance ministers in November by using their voting weight to rebuff a call by the commission for tax increases or spending cuts to bring their deficits back under the limit. The two big countries argued that sticking to the limit would derail a recovery. Spain, the Netherlands, Austria and Finland opposed the decision, which meant the budget rules were effectively suspended. ``The general government balance is expected to deteriorate this year in several EU countries,'' the commission said. ``This situation calls for the activation of the budgetary surveillance instruments.'' In designing the ``stability and growth pact,'' Germany intended it to protect the euro from countries such as Italy running up spending and fuelling inflation. Italian Budget Italy argues that the rules don't allow governments enough freedom to boost growth. ``The pact must first base itself on development and growth, and then on stability,'' Italian Prime Minister Silvio Berlusconi said Saturday in Milan. ``In Italy, the budgetary situation is clearly deteriorating,'' Solbes said in his last Brussels press conference before returning to Madrid to become Spanish economy minister. ``In a medium-term perspective the Italian situation looks even more worrying.''
Italy's deficit will reach 3.2 percent this year, rising to 4 percent next year under Finance Minister Giulio remonti's current plans, the commission said. Tremonti said Saturday that ``Italy will do all it can to stay under the 3 percent.''
The EU executive will also start closer monitoring of Dutch budget plans under the ``excessive deficit procedure'' because the deficit exceeded 3 percent last year. Dutch Finance Minister Gerrit Zalm has pledged to bring the deficit under the limit, though current plans would leave the 2004 deficit at 3.5 percent, the commission said. The U.K. will also be subject to budget monitoring for breaching the limit last year, though its projected decline this year ``bring the procedure to an end,'' the commission said.
Any action will need to be approved by a weighted majority of EU finance ministers, who are exploring ways to change the stability pact. After May 1, any new agreement will require the approval of all 25 countries in an enlarged EU.
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This new guy from Spain is clearly a hawk.
Europe will not cut until it is in a flow blown recession it seems. I will give that until mid-summer or so to develop.
Mish |
