EU warns eurozone recession isn't likely to ease up this year

By Raf Casert

Associated Press

Published: Friday, May 3 2013 8:10 p.m. MDT

Workers repair a letterbox that was forced, at the town hall of Zedelgem, western Belgium, Thursday, May 2, 2013. Somewhere along a wide, non-descript street deep in Belgium, some townspeople have stashed away stacks of euros they literally picked off the street, or swept inside their door two weeks ago, unable to believe their luck. Now, they are secretly hoping nobody ever saw them. (AP Photo/Yves Logghe)

Associated Press

BRUSSELS — Europe will take longer to recover from its economic crisis as it tackles a worse-than-expected recession in the eurozone and unemployment at record levels, the European Union warned Friday.

In its spring economic forecast, the EU said that gross domestic product in the 17 member countries that use the euro will shrink by 0.4 percent this year, better than the 0.6 percent contraction in 2012 but 0.1 percentage points worse than the EU had forecast back in February.

The report also had bad news for the wider 27-country EU: it now expects the region's economy to shrink by 0.1 percent in 2013, against a forecast of 0.1 percent growth in February.

"Grappling with the aftermath of a profound financial and economic crisis, the EU economy is set to pick up speed only very slowly in the course of this year," the report said.

The grim outlook even forced EU Commissioner Olli Rehn to raise the specter that France, the bloc's second biggest economy, may be given two extra years to bring its deficit within the target 3 percent of gross domestic product needed for a sustainable future.

With a population of more than half a billion people, the EU is world's largest export market. If the region's economy remains stuck in reverse, order books for companies in the U.S. and Asia will be hit. Last week, U.S.-based Ford Motor Co. lost $462 million in Europe and called the outlook there "uncertain," although the company's global earnings rose 15 percent to $1.6 billion.

After the eurozone crisis over too much debt broke in late 2009, the region's governments slashed spending and raised taxes — either to meet conditions for bailout loans, or to reassure jittery bond markets. But austerity has also inflicted severe economic pain. Slashing spending and raising taxes have proved to be less effective at reducing deficits than initially thought. As economies shrink, so do their tax revenues, potentially making it harder to close budget gaps.

The impact of the eurozone's austerity measures and recession are being felt even in the region's more prosperous countries. The EU report forecasts GDP growth in Germany, Europe's largest economy, will fall from 0.7 percent in 2102 to 0.4 percent this year as demand from other parts of Europe falls. France, meanwhile, is expected to fall into negative territory in 2013, with GDP dropping 0.1 percent.

Against such a depressing background, Rehn chided France for the "persistent deterioration of French competitiveness" and called for "substantial structural reforms in the labor market."

Instead of moving toward a safe 3 percent deficit, France is forecast to have a deficit of 3.9 percent this year and 4.2 percent next year. The French government said that new legislation is already in the pipeline to cut spending and increase the fight against fiscal fraud to bring its deficit down.

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