Brussels predicts EU economic rebound in 2010

Brussels - The European Union economy is heading for a gradual recovery, with its gross domestic product (GDP) set to increase by 0.7 per cent next year and by 1.6 per cent in 2011, the bloc's executive said Tuesday. Growth in the 16-member group of countries which use the euro should increase by the same rate in 2010 but by a marginally smaller 1.5 per cent in 2011, according to the European Commission's latest estimates. 'The situation is stabilizing and improving,' said EU Economic and Monetary Affairs Commissioner Joaquin Almunia, but 'we see only a gradual recovery in 2010 and 2011.' The rebound, spurred by a massive injection of government money, improvements on the financial markets and an increase in world trade, is set to follow one of the bloc's worst recessions in decades. GDP in 2009 was estimated to have dropped by 4 per cent in the eurozone and by 4.1 per cent in the 27-member EU. Almunia said the latest figures strengthened his argument in favour of EU member states cutting their soaring budget deficits as of 2011, something which national capitals are reluctant to do. 'With these forecasts I will recommend to (EU finance ministers) to confirm that 2011 is the year in which the EU should in aggregate terms start its (fiscal) exit strategy,' Almunia said. The commissioner stressed that the recovery remained 'uncertain' and 'modest', with the 2010 figure well below the bloc's average potential growth rate of 1 per cent. Potential growth is defined as the 'natural' rate of GDP growth when extra fiscal stimulus - or discretionary spending - is excluded. Almunia singled out public finances and rising unemployment as cause for continued concern. Inflation, on the other hand, is estimated at 0.3 per cent this year and is likely to remain well below 2 per cent until 2011. According to the commission's estimates, the percentage of jobless people is set to increase by roughly one-third compared with 2008, reaching 10.7 per cent in the eurozone and 10.3 per cent in the EU as a whole. The European association of trade unions, ETUC, warned that the unemployment situation and a lack of long-term government spending could still drag Europe into a deeper recession. 'We have a recession behind us but another downturn may already be in front of us, certainly in terms of massive jobs restructuring. This implies that the (EU) decision to exit from fiscal stimulus at the latest in 2011 may turn out to be a dramatic mistake,' said Reiner Hoffmann, ETUC's deputy secretary general. In any case, most governments have little margin to cope with the rising unemployment figures, since the commission estimates average state borrowing at 6.9 per cent of GDP in 2009. That figure is set to climb still further, to an average EU budget deficit of 7.5 per cent of GDP in 2010 - smashing the EU's rule that governments should limit their deficits to 3 per cent of GDP. All but six EU member states are set to breach that rule this year, with Britain, Spain, Ireland and Greece heading for jaw-dropping deficits of more than 11 per cent. Even traditionally virtuous Germany is eyeing a deficit of 5.0 per cent in 2010. 'We will ask for a different pace of adjustment from different member states, taking into account the size of the deficit, the position of their public finances in terms of long term sustainability, other macroeconomic imbalances, the need of these countries to be credible vis-a-vis the markets, and so forth,' Almunia said. EU finance ministers were set to review the figures on Monday and Tuesday, with the commission due to adopt recommendations for the correction of excessive deficit on Wednesday, Almunia said. Looking at the GDP estimates for individual countries, Europe's economic locomotive, Germany, is set to post a GDP growth rate of 1.2 per cent in 2010 and 1.7 per cent in 2011, compared to a drop of 5 per cent in 2009. Of the EU's 27 member states, eight - including Spain and Ireland - are only set to come out of recession in 2011. The commission's estimates are based on a dollar-euro exchange rate of 1.48 in both 2010 and 2011 and assume that the price for a barrel of oil will average 51.7 euros (76.3 dollars) in 2010 and 54.3 euros in 2011.