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News : EU Economy Last Updated: May 4, 2013 - 4:49 AM


European Commission increases Ireland's deficit/GDP ratio forecast for 2013
By Finfacts Team
May 3, 2013 - 4:05 PM

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The European Commission today increased its forecast for Ireland’s budget deficit for this year, mainly due to the higher-than-expected costs of liquidating the carcass of  Anglo Irish Bank that was named Irish Bank Resolution Corporation. In its Spring forecasts issued today, the Commission sees Ireland’s deficit at 7.5% of GDP (gross domestic product) this year, compared with February's forecast of 7.3%. It said the deficit will narrow to 4.3% in 2014 after further austerity measures.

GDP growth is forecast at 1.1% in 2013 and 2.2% in 2014. On Tuesday, the Department of Finance forecast rises of 1.3% and 2.4% respectively.

The Commission said annual GDP this year is now forecast to contract by 0.1% in the EU and by 0.4% in the euro area. For 2014, it expects growth of 1.4% in the EU and 1.2% in the euro area.

Inflation continues to decline and it fell below 2% in the first quarter of this year, on the back of falling energy prices. In the euro area, inflation fell to 1.2% this April compared to April last year, which was an unexpectedly large decline after the cut-off date of our forecast. In any event, inflation risks remain firmly contained during the forecast period.

Unemployment is forecast at 11.1% in the EU and at 12.2% in the euro area this year. At the same time, disparities across member states remain large. In Spain and Greece unemployment rates are at an unbearably high level of 27% this year, and expected to fall slightly next while unemployment in Austria is 4.7% and in Germany 5.4%.

The Commission said financial-market conditions "have continued to improve since the second half of last year, and for some countries, like Ireland, even earlier. EU sovereign yield spreads have remained by and large unchanged since the start of the year."

The spreads between interest rates on small compared to larger loans to enterprises have also increased since end-2011. The largest divergence between SMEs and larger corporations can be observed in Spain and Italy. "This is particularly worrisome, since small and medium-sized enterprises usually do not have alternative access to capital markets and we would need SMEs to grow and create jobs in Europe and they need lending for that,' the Commission said.

Public debt will continue to grow over the forecast period, although at a slower pace, reaching 96% of GDP in the euro area and almost 91% of GDP in the EU in 2014. This is an increase of close to 30 percentage points since before the financial crisis.

In some countries, this increase in public debt reflects less than prudent fiscal policy in the years before the crisis. In other countries, it reflects an unsustainable build-up of private debt, which led to financial and banking crises. In both cases, the re-pricing of risk and the increased costs of debt service has increased the pressures to reduce debt.

Europe is moving on with the necessary fiscal consolidation, starting from a deficit of above 6% of GDP in 2010. "We expect the headline deficit to fall to 3.4% in the EU and 2.9% in the euro area in this year."

Today's report says: "In the euro area, this reflects a fiscal consolidation effort of about 1½% of GDP last year. On the basis of 2013 national budgets, we expect consolidation measures of about ¾% of GDP in the EU and the euro area, which means that this year in relative terms, half the amount of fiscal consolidation than last year (form 1½ to ¾ % of GDP). The decisions on which these budgets are based were made in 2012, in line with the Commission’s recommendations of last spring a year ago."

Why is this slowing down of fiscal consolidation possible? It has been made possible by three factors:

  • first, the increased credibility of fiscal policy which the euro area member states have achieved since 2011;
  • which, second, has reduced macro-financial risks and enabled the ECB to take further decisive action to stabilise the markets;
  •  and third, the reform of EU economic governance, which now provides an effective medium-term framework for a gradual fiscal adjustment and the advancement of structural reforms.

Latvia and Romania have both reduced their deficits below 3% in 2012 and they stay below the reference value also during the forecast period. Both countries therefore seem to be firmly on track for a sustainable correction of their excessive deficit, and thus for an exit from the EDP.

Lithuania’s 2012 deficit is close to the 3% reference value. Since its debt remains below 60% of GDP, it would be eligible for the rule that takes into account the net cost of a systemic pension reform. Therefore Lithuania could be a candidate for abrogation.

Italy reduced its deficit from 3.8% to 3.0% of GDP in 2012. For this year, the deficit is forecast to stay below 3% of GDP, which facilitates exiting the EDP (excessive deficit procedure), subject to the continued commitment to sound public finances. The consolidation in structural terms amounted to about 3% of GDP between 2011 and 2013, which brings Italy close to its medium-term objective of a balanced budget. Balancing the budget in structural terms is important in view of Italy’s very high level of public debt.

The abrogation from the EDP will require that the deficit stays below 3% of GDP this year and beyond, taking into account measures that the new government intends to take. In parallel, a broad-based structural reform agenda is essential to reverse the deep-rooted and long decline in Italy’s competitiveness and thus boost its export performance.

Olli Rehn, EU economic and financial affairs commissioner said : "Hungary has kept the deficit well below 3% of GDP in 2012, but would exceed the 3% threshold slightly again in 2013 and 2014

In France, the recovery is now expected to be delayed, which evidently has repercussions on public finances as well.

We now project the deficit at 3.9% of GDP this year and at 4.2% next year. This is clearly higher than in the Stability programme of France, because their growth forecast is, in our view, overly optimistic. Therefore, in order to bring the deficit below 3% next year 2014, as envisaged by the French authorities, significantly larger and front-loaded effort of fiscal consolidation would be required than is currently planned.

Considering the economic situation, it may be reasonable to extend the deadline by two years and to correct the excessive deficit at the latest by 2015 in France. In any case, it is essential that France fully implements the envisaged measures and soon specifies further actions to meet the objectives in fiscal policy.

Underlying our growth forecast is the persistent deterioration of French competitiveness. Therefore a credible medium-term fiscal strategy needs to be complemented with substantial structural reforms in the labour market, pension system and opening up markets. That is key to unlock the growth potential that France so badly needs and to unlock improving employment that France so badly needs."

In Spain, the aftermath of the credit boom is weighing heavily on the economy and employment, and on the Spanish people. "With the view of the worse economic outlook and thanks to the credible medium-term fiscal strategy, we have advised the Spanish government to extend the timeline to correct the excessive deficit by two years, from 2014 to 2016.

"In Slovenia, bringing the deficit below 3% of GDP now seems out of reach, as measures to support the banking system strain public finances. Extending the deadline for the correction of Slovenia’s excessive deficit can be considered, but will have to be embedded in a broad based reform strategy, addressing the country’s imbalances.

For the Netherlands, the deficit is also forecast to exceed 3% of GDP this year, related to the nationalisation of a bank-insurance company and to a macroeconomic situation that is worse than expected. This would allow a revised recommendation to bring the deficit below 3% next year."

Rehn added: "In Poland, the 2012 deficit was 3.9% of GDP, which is obviously too high to be eligible for the special rule regarding the net cost of a systemic pension reform. It seems that the recommended fiscal effort was made, but the deficit will still remain around 4% of GDP over the forecast period. This will necessitate a revised recommendation under the EDP."

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