EU cuts euro-area inflation forecast, warns nations on debt

Brussels: The European Commission told the euro area’s largest economies to reduce debt and modernize labour markets as it again slashed its inflation forecast and warned of slower-than-predicted growth across the 19-nation bloc.

France, Spain and Italy, which have persistently failed to hit European Union budget targets, are still off track, the Brussels-based commission said on Tuesday. Gross domestic product in the currency area will increase by 1.6% this year and 1.8% in 2017 — both a full percentage point lower than the commission forecast in February. Inflation will average 0.2% this year, below the European Central Bank’s target.

“Decisive policy action to reform and modernize our economies is the only way to ensure strong and sustainable growth, more jobs and good social conditions,” European Commission vice president Valdis Dombrovskis said in a statement. “High levels of public and private debt, vulnerabilities in the financial sector or declining competitiveness” remain the biggest problems.

Six years since Greece received its first international bailout, the scars across the wider euro area remain unhealed. Nations have been unable to narrow deficits and scale back debt to EU-agreed limits and economic output lags behind the US.

Even as the ECB uses a mix of low or negative interest rates in addition to €80 billion ($92 billion) per month in asset purchases, inflation is expected to be less than half the 0.5% the commission predicted in February when it last issued forecasts, and below the ECB’s goal of just under 2%. It will average 1.4% in 2017, the commission said.

Spanish targets

Political and social upheaval triggered by the biggest influx of refugees since World War II, the possibility of the UK leaving the EU, an aggressive Russia, the rise of anti-establishment parties and terrorism in its biggest capitals provides a tumultuous backdrop to Europe’s economic fatigue.

“There are heightened geopolitical tensions in Europe’s immediate neighbourhood and farther afield and there is serious uncertainty within Europe,” Marco Buti, the commission’s director general for economic and financial affairs, said in a statement accompanying the economic forecasts. “Although it stems from various domains and circumstances, much of it relates to the same broad theme, namely the capacity and the continued willingness to find and implement common solutions to common challenges.”

The commission confirmed its forecast that Spain, with a caretaker government since December, will miss its deficit-reduction goal for a ninth straight year in 2016, meaning the nation could become the first to receive a financial penalty from the EU.

Its deficit will be 3.9% of GDP in 2016 and 3.1% in 2017, still exceeding the EU’s 3% ceiling, the commission said, and wider than the 3.6% and 2.6% it forecast in February. The commission cut its forecast for Spanish GDP growth in 2016 to 2.6% from the 2.8% it predicted in February.

In March, the EU warned Spain that it needed to “take measures to ensure a timely and durable correction of the excessive deficit” and to submit a detailed plan of how it was to do so. The commission has the power to fine countries that persistently breach their deficit commitments up to 0.2% of GDP and send troika-style inspectors to scrutinize national officials. EU commissioners are scheduled to take a decision later this month.

Italy — which has the highest mountain of debt per GDP in the euro area after Greece — is also under scrutiny. The commission forecasts Italy’s public debt to be 132.7% of GDP in 2016, representing no decline from 2015. That’s more than double the EU’s 60% threshold.

The commission downgraded Italy’s growth forecast to 1.1% in 2016 from the 1.4% it predicted in February.

Italy is also under pressure because its structural deficit — stripping away one-off payments and the effects of the business cycle — is widening, from 1% of GDP in 2015 to a forecast 1.7% in 2016.

France, the euro area’s second largest economy, which the commission warned in March about its increasing public debt and worsening productivity growth, will also continue to expand more sluggishly than the bloc as a whole. The commission forecasts growth of 1.3% of GDP in 2016 and 1.7% in 2017.

‘Determined action’

France’s public debt will spiral to 97% of GDP in 2017 from 96.4% in 2016 and 95.8% in 2015, according to Tuesday’s forecast.

“The recovery in the euro area remains uneven, both between member states and between the weakest and the strongest in society,” European Economic Affairs Commissioner Pierre Moscovici said in a statement. “That is unacceptable and requires determined action from governments, both individually and collectively.”

The euro-area’s unemployment rate, which is slowly declining from record levels, is forecast to fall to 9.9% in 2017, from 10.3% in 2016 and 10.9% in 2015. Bloomberg