MercoPress. South Atlantic News Agency

EU “no longer in freefall” but 2010 modest recovery is still distant

The European Union is forecasted to contract 4% in 2009, which is double what was announced at the beginning of the year. Average unemployment is set to rise to 9.4% this year and could reach 10.9% in 2010, while government deficits inside the 27-member union will average 6% of GDP, twice the figure allowed for Euro area countries and used as a marker for the rest of the union.

“The European economy is in the midst of its deepest and most widespread recession in the post-war era,” said EU Economic and Monetary Affairs Commissioner, Joaquin Almunia. He added that Europe's economy would not start recovering until the second half of next year. But Almunia also tried to cast an optimistic light over some new data.

“The ambitious measures taken by governments and central banks in these exceptional circumstances are expected to put a floor under the fall in economic activity this year and enable a recovery next year”. He added countries needed to focus on cleaning up banks' toxic assets.

“The outlook is still gloomy but for the first time since mid-2007 some positive signals have appeared over the last few weeks,” he said. “We are no longer in freefall.”

Improved business expectations within the EU and positive export data from Asia point to a stabilization of Europe's economy in the second half of this year and a return to growth in 2010, he said.

However in 2008 the economies of seven EU states suffered an annual drop in GDP, yet this year the commission estimates that only Cyprus is set to enjoy positive growth. Germany, Europe's biggest economy, is expected to contract 5.4% this year, while the UK and Italy are expected to shrink by between 4% and 4.5%. The once-booming Irish economy will see a 9% drop and Latvia will shrink by 13.1%, the commission said.

Faced with falling public demand, companies across the EU are currently cutting jobs and production levels as they struggle to stay alive. As a result, only Luxembourg will see more people enter the workforce than leave this year according to the new data, with EU unemployment set to rise from 7% in 2008 to 9.4% in 2009. The two extremes predicted are Netherlands with 3.9% this year, while in Spain unemployment is set to average 17.3%.

Falling tax receipts and the rising cost of social benefits and government stimulus packages are pushing member state budgets further into the red. In March the commission initiated the first stage of excessive deficit procedures against France, Greece, Spain and Ireland due to 2008 budgets deficits exceeding 3%.

Hungary and the United Kingdom have already received commission guidelines under the procedure that can only result in fines for the 16 Euro-zone members. Based on the commission's new data, Malta, Poland, Lithuania, Latvia and Romania will now also receive recommendations from the commission on how to tackle their budget deficits.

Both Spain and Ireland are likely to emerge more slowly from the recession than other EU states as their economies are currently going through a painful housing market correction. While EU growth for 2010 is predicted to be minus 0.1%, growth figures for Ireland and Spain will be minus 2.6% and 1% respectively.

Nevertheless the Commission’s forecast is not as bleak as the outlook from the International Monetary Fund (IMF) - which says Euro zone GDP will fall by 4.2% this year. But it is less optimistic than the European Central Bank which forecast a 3.8% contraction in its latest estimate.

The commission expects inflation to fall well below the European Central Bank's target of 2%. It projects inflation to slow to 0.4% this year from 3.3% in 2008, and to rise to only 1.2% in 2010.