EU sees hope of recovery from recession this year

By Raf Casert

Associated Press

Published: Friday, May 11 2012 7:14 a.m. MDT

A broker sits in the stock exchange in Madrid Tuesday April 10, 2012.

Paul White, Associated Press

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BRUSSELS — The European Union says that a recession brought on by a crippling debt crisis could give way to a modest recovery later this year — provided governments persevere on the tough austerity track.

It suggested that more growth-enhancing measures can be pursued alongside strict budgetary controls, but only as long as they do not detract from achieving deficit reduction targets.

In its half-yearly economic projections, the European Commission, the executive arm of the EU, said Friday that the economy of the 17 countries that use the euro will shrink by 0.3 percent this year.

The forecast reflects the huge impact Europe that austerity measures, such as spending cuts and tax hikes, have had on the region. In November, the Commission was predicting growth of 0.5 percent in 2012.

Over the past few weeks, there's been a rising tide of opinion across Europe that the austerity approach alone isn't working in getting the public finances back into shape fast enough.

Budgets cuts have pushed many euro countries into recession and forced up unemployment in countries like Spain to nearly one in four.

Shrinking economic output means lower tax revenue for the government and increasing unemployment bills, making it more difficult for countries to get borrowing levels down.

That's why French President-elect Francois Hollande made a more growth-oriented approach the platform for his victory over Nicolas Sarkozy in last Sunday's election and why a majority of Greeks voted against parties that were backing austerity.

Pushing back against these calls, the EU's monetary affairs chief Olli Rehn said that if countries continued with the budget cuts, growth would return next year, and that the current recession is likely to be "mild" and "short-lived."

He insisted governments with excessive debt and deficits continue with the belt tightening.

"We cannot pile debt over debt and it is essential that we are continuing fiscal consolidation and staying the course," Rehn said during the presentation of the EU's Spring economic forecasts.

Rehn acknowledged the growing chorus of voices saying European economic policy needs to complement the focus on austerity with policies that help growth. But he said such stimulus could not detract from the wider effort of healing public finances.

"We need to boost economic growth by targeted investment and that is why it is important that we are seeing a rebalancing of the European economy for the moment," Rehn said.

A recession is commonly defined as two consecutive quarters of negative growth and figures next week are expected to show that the eurozone contracted by a quarterly rate of 0.2 percent for the second quarter running.

Rehn highlighted the sharp differences in economic fortune within the 27-nation European Union with Germany and Poland holding steady and even growing while the southern rim from Greece to Portugal is suffering.

For Athens, the Commission laid out the prospect of another grim year ahead. It's forecasting a 4.7 percent economic contraction in Greece to follow 2011's 6.9 percent. However, it said the Greek economy should flatline next year but that's based on the assumption of unchanged policies.

With a second round of elections appearing likely in Greece next month, there are concerns that the country may not meet its commitments to international creditors and that its bailout may be halted, putting its future in the euro under severe threat.

Greece has enacted a raft of austerity measures over the past few years in the hope of getting a handle on its borrowings. Some progress is being made on the public finances front but the country is still in a parlous situation.

The Commission predicts that the Greek budget deficit will narrow to 7.3 percent of national income this year. Though down from last year's 9.1 percent, the level of borrowing is still double the 3 percent limit that was supposedly enshrined in euro membership.

"I trust that the Greek political forces will aim at soon forming a coalition government that can ensure that Greece will indeed return to sustainable footing and return to growth and competitiveness," Rehn said.

Spain was also causing worries, particularly the state of its banking sector and out-of-control spending by the regions.

Rehn said a solution for Spain "calls for very decisive action in order to recapitalize the savings bank sector and restore its viability." On top of that, Spain needs to get a "very firm grip to curb the excessive spending of regional governments."

The Commission also lowered its growth forecasts for France. Hollande immediately suggested that outgoing leader Sarkozy's government underestimated the country's budget problems.

He said the new figures do not necessarily mean he has less room to maneuver to fulfill his campaign pledges after he takes office Tuesday. "No, we had already expected this," he said.

Pylas contributed from London. Angela Charlton contributed from Paris.

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