Tough forecast a wake-up call, warns Rehn

THE EU economy is moving into dangerous territory with growth slowing to stagnation and a new recession looming large, according to the latest forecast.

Economics Commissioner Olli Rehn bluntly said: “This forecast is the last wake-up call. The recovery in the EU has come to a standstill and there is a risk of a new recession.”

One bright spot is Ireland, with the European Commission expecting growth to be double the EU average next year at 1.1%, surpassing Germany and France and doubling again to 2.3% in 2013.

However the projection of 1.1% — similar to this year’s estimate — is well down on the 1.9% it forecast six months ago and reflects its fears that the global slowdown will affect exports.

“Weaker than expected global demand in 2012 is a very real risk,” and will result in lower growth, it said. It is not expecting any quick turnaround in job creation either despite labour costs continuing to fall mainly as wages are depressed.

“A pick-up in employment is likely to lag considerably,” with no pick-up in employment until 2013.

Mr Rehn slashed his growth forecast for the eurozone from 1.8% in the spring to just 0.5% because of growing sovereign debt and banking problems and the slow down of the global economy.

“Pulled down by elevated uncertainty, business and consumer confidence is plummeting, delaying spending decisions, weighing on domestic demand and economic growth,” the forecast says.

It is a vicious cycle with low growth creating market volatility, dampening confidence, raising the cost of borrowing for countries and eating into banks assets.

“Any further bad news” could make this cycle worse “pushing the EU economy back into recession”.

The decisions taken by EU leaders at recent summits would not help either, the commission said.

“Despite progress made at European summits, recent developments suggest that it will take more than a few months to cope successfully with the formidable policy challenges,” said Mr Rehn.

In December, the commission’s new powers over member states’ national budgets come into force and Mr Rehn warned that several countries will be told they have to get their deficits under control.

The commission is forecasting an upturn in 2012 with the eurozone economy increasing 1.3%, down from 1.8% predicted in the spring. It suggests Ireland will have the one of the highest growths in the zone, at 2.3%, behind Estonia and Slovakia. However, Latvia, which has suffered a severe depression, is forecast to have growth of 4%.