Market tensions ‘pushing up the cost of borrowing’

FINANCIAL market tensions that are pushing up the cost of borrowing for countries including Ireland pose one of the main threats to growth in the EU, according to the European Commission which has just doubled its eurozone growth forecast for the year to 1.7%.

And the Government was warned that it must maintain its efforts to reduce the budget deficit despite having to put massive amounts of money into Anglo Irish Bank.

The EU’s interim forecast looked at the eight largest member states representing 80% of the bloc’s economy and found that growth this year so far has been better than expected, driven by stronger domestic demand.

Germany is leading the way with what Economics Commissioner Olli Rehn described as a “robust recovery”, with growth of 3.4% forecast. Poland’s growth is expected to match this, followed by the Netherlands at 1.9%, Britain at 1.7%, France, 1.6%, Italy 1.1% with Spain still in recession at -0.3%.

But the risks to growth remain high with financial market tensions, he said, referring to the rising cost for peripheral countries such as Ireland and Portugal of raising money on the markets.

“Markets have recovered somewhat but further tensions cannot be ruled out”, Commissioner Rehn cautioned, with high debt levels and lingering tensions in sovereign-debt markets.

He refused to be drawn on whether he agreed with the Government’s view that the cost of Anglo Irish to the taxpayer will be manageable. “The Irish Government has convincing plans to complete the financial repair in Ireland and, as we know, it’s unfortunately going to be quite costly”, he said.

Asked if further cuts in spending or tax increases would be necessary for Ireland to reduce its budget deficit to 3% as agreed by 2014, he said, “It’s very important that Ireland will maintain its rigorous approach to public finances despite the challenges of its financial repair”.

Sovereign-bond spreads had narrowed since the Greek debt crisis, the report said, but noted, “they are still significantly above the levels seen at the beginning of the year” and they were widening against German bonds for some countries. Last week they hit a high for Ireland before falling slightly after the Government announced the eventual winding down of Anglo Irish.

Mr Rehn said he was very concerned about the prospects of a two-speed recovery in the EU. He warned countries falling behind they must implement structural reforms to help jump-start their economies and to enable them to capitalise on the growth of other member states.

Globally, the commission said the recovery is set to go through a soft patch in the second half of the year, though a double dip seems unlikely. Despite this global GDP, excluding the EU, is expected to grow by 5%, 0.25 pp higher than the spring forecast.