Brussels goes soft as growth forecasts plummet

Struggling European economies are expecting a reprieve later today when the European Commission issues annual economic recommendations to its 27 member states.

by Emma Haslett
Last Updated: 18 Jun 2013

The report – essentially an opportunity for Brussels bureaucrats to lambast governments they aren’t impressed with – is expected to ease restrictions on the French, Spanish and Dutch economies in an attempt to increase growth.

This morning’s FT reckons Holland will be given an extra year to reduce its deficit to 3%, while France and Spain will be given an extra two years. Italy will also be granted absolution from ‘intensive fiscal monitoring’ – despite a decision by its new prime minister to reverse a series of tax increases brought in by his predecessor.

But the EC is adamant it isn’t entirely abandoning is hard line on austerity: the report will criticize ‘several governments’ for their inability to take the necessary steps to bring about fiscal reform, including France, Spain, Belgium and even the UK – although its position outside the eurozone means we will avoid the lion’s share of the EC’s wrath.

Some economies could even face sanctions under new ‘macroeconomic imbalances’ rules granted to the EC earlier this year, which give it the power to override governments and impose its own economic reforms. If they don’t co-operate, it will hand them a substantial fine instead. Slovenia could be the first country to come under the EC’s spotlight – although there’s a good chance it will get off with a warning.
Needless to say, European markets have reacted with all the enthusiasm of a Frenchman at a British chippie. The FTSE 100 has dropped by 1.13%, while Germany’s Dax is down 0.97% and the French Cac is down 1.01%.

That probably hasn’t been helped by a series of depressing growth forecasts. The International Monetary Fund kicked things off this morning by cutting its Chinese growth forecast from 8% to 7.75% - after which the OECD trimmed its forecast for global growth to 3.1% for this year and 4% next year – down from its November forecasts of 3.4% and 4.2%.

OECD chief economist Pier Carlo Padoan has urged the eurozone to consider quantitative easing, saying that the region is ‘in a dire situation’ and that it ‘should consider more aggressive options’.

The ECB, however, is unlikely to be enthusiastic: it’s run its own bond purchase programmes in the past but has always taken the equivalent amount out of markets to avoid inflation. The phrase ‘old dog, new tricks’ comes to mind…

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