EU hopeful eurozone will start growing in 2013

BRUSSELS The European Union predicted Friday that the economy of the 17 member countries that use the euro will see its fortunes improve as the year goes by even though it expects the recession to last longer than it previously thought.

In its winter forecast, the EU Commission, the EU's executive arm, said the eurozone is likely to contract a further 0.3 percent this year, in contrast to its prediction last November of 0.1 percent growth.

Across the eurozone, the Commission said the debt crisis and the associated budget tightening continue to weigh on activity -- figures last week showed the eurozone contracted by 0.6 percent in the final quarter of 2012 from the previous three-month period. The eurozone has been in recession -- officially defined as two consecutive quarters of negative growth -- since the second quarter of 2012, when concerns about the future of the euro currency were particularly acute.

Many countries are in deep recessions, such as Greece and Spain, as they push often-severe spending cuts and tax increases to get a grip on their public finances. Others have suffered in the fallout, such as Germany, Europe's largest economy, which contracted by a quarterly rate of 0.6 percent in the final quarter of 2012 as its main export markets in Europe faltered.

Despite what it terms "headwinds," the Commission said it expects the eurozone recession to bottom out over the first half of 2013. By the fourth quarter of 2013, it forecast that the eurozone economy will be 0.7 percent bigger than the same period in 2012. In 2014, growth of 1.4 percent has been penciled in.

A number of recent economic confidence indicators have pointed to an improving outlook, particularly in Germany. Much of the recent calm in financial markets with regard to the eurozone has been credited to the debt-reduction measures taken by many countries and a commitment by the European Central Bank's president Mario Draghi to do "whatever it takes" to save the euro.

"The decisive policy action undertaken recently is paving the way for a return to recovery," said Olli Rehn, the Commission's top economic official.

The wider economy of the 27-nation EU, which includes non-euro members such as Britain and Poland, is also bottoming out, according to the Commission. Here too, the Commission lowered its 2013 growth forecast from 0.4 percent to 0.1 percent. And in 2014, it expects the world's largest economic bloc with 500 million people to grow by 1.6 percent.

One of the key problems afflicting Europe at the moment is unemployment, and the Commission said a marked improvement was unlikely anytime soon, with the jobless rate in the EU rising to 11 percent and the eurozone rate swelling to a record 12 percent.

While unemployment is high overall, the trend is not uniform: Germany has seen unemployment falling as its exporters have benefited from the pick-up in global trade. However, those countries, mostly in southern Europe, where market concerns over excessive public debt have pushed governments to make the toughest budget cuts, are recording sky-high levels. In the case of Greece and Spain, unemployment already is over 25 percent and expected to rise to around 27 percent.

The Commission forecast that Germany's economy will grow 0.5 percent this year, but France, Europe's second-largest economy, will record only 0.1 percent growth. Italy and Spain are expected to decline 1 percent and 1.4 percent respectively.

Meager growth, in turn, means that some governments might have to tighten their belts even further - possibly in France, where the government's 2013 budget is predicated on a growth rate of 0.8 percent.

Given its paltry level of growth, the Commission said France was likely to miss its target of getting its budget deficit down to below 3 percent of its annual gross domestic product. Instead, it predicted that the deficit will actually rise from 3.7 percent of GDP this year to 3.9 percent next. And it forecast that the country's overall debt burden will rise from 90 percent of GDP last year to 95 percent in 2014.

Rehn urged the French government to push ahead with measures to reduce its deficit and implement reforms to the labor market and to pensions. "France faces significant challenges," he said.

Tom Rogers, senior economic adviser at Ernst & Young, said he was encouraged with the Commission's message on the need for countries to continue with their ongoing policy efforts.

"Reforms are already bearing fruit in a number of peripheral economies, and this should be an incentive for other governments to follow suit," said Rogers.

Greece has been the country that has pursued the most difficult reforms and austerity over the past few years and the Commission forecasts for the country show it's still a long way from healing.

The country, according to the Commission, will contract a further 4.4 percent this year -- Greece's sixth year in recession -- before posting growth of 0.6 percent in 2014.

One bright spot is that the Commission expects Greece to achieve a primary budget surplus -- whereby revenues are higher than spending excluding interest payments -- sometime this year. However, given the depth of its recession, Greece's debt burden will continue to rise from 162 percent of annual GDP in 2012 to 175 percent this year and next.