EU emerging from recession but threats remain

THE EU is coming out of recession, according to figures from the big member states.

And for the first time since the start of the economic crisis the European Commission has not revised its forecast downwards for the coming months.

But while the outlook for the EU is more positive, the good news was heavily laced with warnings that the effects of the crisis were not likely to disappear overnight. GDP is still expected to fall by 4% on average this year, while employment and public finances continue to pay the cost.

Part of the improvements are due to special measures taken by governments that have pumped the equivalent of 2.5% of GDP into their economies. But this may not be sustained during 2010, Economic Commissioner Joaquin Almunia warned when he delivered his interim EU forecast.

Unemployment will continue to increase as the impact on labour markets lags by six to nine months, he warned. In the meantime, countries must continue to support unemployed workers with benefits and training to be ready when growth returns and to prevent long-term unemployment.

“Rising unemployment could weigh on consumption, while ample spare capacity and an anaemic credit supply might restrain investment. A further negative feedback loop can therefore not be ruled out,” the commission’s report said.

On the other hand, government policy measures could prove more effective in restoring financial health. “The strength of the recovery could surprise on the upside in the near term, but its sustainability is yet to be tested,” it added.

Governments need to continue to implement recovery strategies next year and quicken the pace of repairing the financial sector to get banks lending at reasonable rates again.

An exit strategy in which states begin to withdraw their stimulus will need to be coordinated. “We were not prepared to cope with the crisis and now we need to be prepared for the exit strategy and we need to be politically committed to coordinate our actions to be as efficient as possible,” he said.

The report did not consider the situation in Ireland. But Mr Almunia said the stimulus for Ireland and others hit hard, including Greece and some newer member states, would be taken into account in the full forecast later this year.