Valdis Dombrovskis.  Picture: BLOOMBERG/JASON ALDEN
Valdis Dombrovskis. Picture: BLOOMBERG/JASON ALDEN

BRUSSELS — The European Commission raised its eurozone growth forecast as the effect of a weaker euro and unprecedented monetary stimulus help the economy overcome pressure on confidence from the continuing crisis in Greece.

Gross domestic product (GDP) in the 19-nation currency bloc is forecast to increase 1.5% this year, up from a prediction of 1.3% in February, according to the commission, the European Union (EU) executive in Brussels.

It slashed its growth projections for Greece at a time when the cash-strapped country is struggling to persuade its eurozone partners to help pay its bills.

"The legacy of the crisis will continue to be felt for years," the head of the commission’s economics department, Marco Buti, said. "Will the economy be able to generate a self-sustained and balanced expansion once these temporary tailwinds fade? The answer is not self-evident."

The European Central Bank’s (ECB) quantitative-easing programme "is having a significant impact" on financial markets and the economy, the commission said. "Fiscal policy is also accommodating growth." Lower oil prices, the euro’s depreciation and steady global growth also supported the European economy, it said.

Tuesday’s report shows that while the eurozone is slowly recovering, France, the bloc’s second-largest economy, will not expand as quickly next year as the EU forecast three months ago. Italy, the third-largest eurozone economy, will see its debt pile get larger this year as it records growth of 0.6%, according to the forecasts.

The cut in the growth forecast for Greece — where Europe’s debt bomb exploded more than five years ago — may make it harder for Prime Minister Alexis Tsipras’s government to convince the EU and the International Monetary Fund (IMF) that it should cut back austerity while it struggles to record a primary budget surplus.

"There is a choice for the Greek government to make — time is running out," European Commission vice-president Valdis Dombrovskis said. "All fundamentals for a return to growth and stability are still … there."

Greece would grow by 0.5% this year, the commission projected. That compares with a 2.5% prediction in the EU’s forecasts published in February.

"Positive momentum" in the Greek economy had "been hurt by uncertainty since the announcement of snap elections in December", the commission said.

"The current lack of clarity on the policy stance of the government vis-a-vis the country’s policy commitments in the context of the EU/IMF support arrangements worsens uncertainty."

The commission forecast eurozone inflation to start creeping up again and avoid the deflation it predicted in February. Yet it will remain below the ECB’s goal of just less than 2% this year and the next. Inflation would stand at 0.1% this year, before quickening to 1.5% next year, the commission said.

Eurozone consumer prices ended a four-month streak of declines last month, underpinning ECB president Mario Draghi’s claim that his programme of quantitative easing is already having an impact.

"The expanded asset-purchase programme adopted by the ECB has lowered interest rates while stabilising inflation expectations, thus reducing the real interest rate," Mr Buti said.

A significant weakening in the euro and a decrease in the price of oil had also helped the eurozone recovery, the commission said. The euro had fallen 8.3% against the dollar since the start of year. The cost of oil had decreased by more than half since a peak in June, the commission said.

The EU said that tension with Russia over its involvement in violence in Ukraine, which had led the bloc to impose sanctions, could have a negative effect on growth.

Unemployment in the euro bloc looks set to "remain intolerably high for a long time", according to Mr Buti. It would gradually decrease from a projected 11% this year to 10.5% next year, the commission said.

The commission downgraded its 2016 growth forecast for France. It forecast GDP to expand 1.7% next year, having predicted 1.8% in February. France would grow by 1.1% this year, it said, a slight improvement on the 1% forecast in February.

"A lower pace of structural reforms could jeopardise the nascent improvement in household and business confidence," according to the report.

Tuesday’s forecast signals that France’s deficit will narrow from 4% of GDP last year to 3.8% this year and 3.5% next year. Earlier this year, the commission allowed France two extra years to meet the EU’s deficit target of 3% of GDP.

Italy’s economy, which has the second-largest amount of debt in the region after Greece, will grow by 0.6% this year, according to the report. The commission predicts growth of 1.4% next year, compared with its February forecast of 0.6% and 1.3%, respectively.

Bloomberg

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