'Euro zone to flatline in 2013, pick up in 2014'

Nov 07 2012, 21:38 IST
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Euro zone. (Reuters) Euro zone. (Reuters)
SummaryThe economy of the 17 countries sharing the euro would grow only 0.1 percent in 2013, says EC.

The euro zone economy will barely grow next year but pick up in 2014, the European Commission said on Wednesday, forecasting slower growth than governments in all the bloc's biggest economies expect.

The European Union's executive arm said the economy of the 17 countries sharing the euro would grow only 0.1 percent in 2013 after a bigger than previously forecast 0.4 percent contraction this year as a result of the sovereign debt crisis.

Growth is predicted to rebound to 1.4 percent in 2014 as structural reforms now under way start bearing fruit, the Commission said.

The aggravation of the sovereign debt crisis in the first half of the year, with rising market concerns about the long-term viability of the euro area and negative feedbacks between banks' funding pressures and economic activity ... are the main reasons for the disappointing growth performance in 2012, the Commission said.

The weak staring point will keep growth low to non-existent in 2013, it said, and any expansion would be mainly thanks to net exports, which will benefit from a recovery in global demand.

Domestic demand will make no contribution to growth well into 2013 as households curb spending amid record high unemployment and higher taxes imposed as part of fiscal consolidation efforts by governments.

Government spending cuts made to regain market confidence, will bring the overall budget deficit for the area down to 3.3 percent of gross domestic product this year from 4.1 percent in 2011. The shortfall will fall further to 2.6 percent next year and 2.5 percent in 2014, the Commission said.

Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time, EU Economic and Monetary Affairs Commissioner Olli Rehn said.

Europe must continue to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth to bring unemployment down from the current unacceptably high levels, he said.

The Commission made less optimistic growth forecasts for all the biggest euro zone countries than their governments have.

Germany, the biggest in Europe, would grow 0.8 percent in 2012 as Berlin expects, but only 0.8 percent in 2013, rather than 1 percent forecast by the government, the Commission said.

The bloc's number two economy France would grow only 0.2 percent this year, 0.4 percent in 2013 and 1.2 percent in 2014, rather than the 0.3, 0.8 and 2.0 percent respectively forecast by Paris.

The French budget deficit would be 4.5 percent of GDP this year, 3.5

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