Eurozone downturn and deficits to persist, Commission says

Anti-cuts protestors in Madrid earlier in February
Image caption The scale of Spain's spending cuts has been unpopular, but it will have to go further if it is to meet EU targets

The eurozone recession will persist into 2013, the European Commission has conceded in its latest forecast.

Governments face an uphill battle to rein in their overspending, with Spain, France and Portugal all failing to cut their deficits to agreed targets.

Spain's deficit, at 10.2% of GDP in 2012, was well above its 6.3% target, and would stay above target into 2014.

The eurozone economy would shrink 0.3% in 2013, the Commission said, making the governments' task even harder.

Previously, the Commission had expected the 17 economies in the eurozone to collectively enjoy 0.1% positive growth this year. In 2012 the economy is estimated to have shrunk 0.6%.

Delivering its winter forecast, Commission Vice-President Olli Rehn said that unemployment across the single currency area expected to continue rising to 12.2% this year as the recession lingers. Last year's jobless rate was 11.4%.

However, he said the eurozone was expected to rebound in the last three months of this year, registering 0.7% growth in the fourth quarter.

The forecast appears somewhat more pessimistic than the European Central Bank President Mario Draghi, who last month said he believed the eurozone would begin recovering in the second half of this year.

The Commission's acknowledgement that the eurozone is in worse economic shape than previously mirrors a change in the International Monetary Fund's thinking. The IMF said in January that it expected the eurozone to experience a "mild recession" in 2013, having previously predicted growth.

Plea for more time

The austerity measures being implemented by eurozone governments are widely blamed by economists as a major contributor towards the Continent's economic woes, although there is disagreement among economists as to whether governments should therefore go easy on the spending cuts.

Spain, which has one of the biggest budget deficits, made the least headway in bringing its finances back under control, and faces one of the nastiest recessions.

Of its 10.2% deficit in 2012, 3.2 percentage points was due to the cost of cleaning up its banking system, which has been decimated by loans made to property developers and speculators during the last decade's housing bubble that have since proved unrepayable.

More worryingly, the Commission does not expect Spain to improve greatly over the next two years. Its deficit is forecast to be 6.7% this year, compared with a 4.5% target, and 7.2% in 2014, compared with a 2.8% target.

Spain cannot simply blame its weak economy for this outcome, the Commission implied. Madrid's structural deficit - which strips out the effect of the recession - fell only by 1.4% of GDP last year, barely half the 2.7% target set by the Commission.

However, overspending by governments across the eurozone as a whole is still expected to fall on average this year. That is despite the persistent economic downturn, which typically reduces governments' tax revenues and increases their benefit bills.

The Commission said that the aggregate deficits of the 17 eurozone governments would fall from 3.5% of economic output or GDP last year, to 2.8% this year.

Meanwhile, the Commission was concerned about a "surprise" fall in Portugal's economy, which shrank 3.2% in 2012 and is forecast to contract by another 1.9% in 2013.

The country may need to be granted an extra year to bring its deficit within the long-term target of 3% of GDP from an expected 4.9% this year, Prime Minister Pedro Passos said, at a specially-called press conference.

'Problem child'

The Commission is also considering giving France one more year, until 2014, to get its finances under control, according to Mr Rehn. Paris is expected to record a 3.7% deficit this year, well above the 3% target.

Earlier on Friday, France had been dubbed a "problem child" by Michael Fuchs, a senior member of German Chancellor Angela Merkel's CDU political party.

"The French need to do their homework - they're very, very behind other countries and that is alarming because France is the second biggest economy in Europe," Mr Fuchs told Germany's Deutschlandfunk radio.

The French government is under pressure to loosen up labour market rules - including the ditching of its 35-hour week - in order to regain international competitiveness.

Meanwhile, the Commission told the British government that it would need to take additional austerity measures.

The Commission said the UK was also not on target with its deficit reduction, with government overspending expecting to increase to 7.4% of GDP this year, the worst in the European Union, from 6.3% in 2012.

The UK economy was predicted grow 1% in 2013, compared with the 1.1% previously forecast.