The euro area’s budget deficit will swell to a record next year with all 16 countries breaching EU rules as governments keep pumping cash into their economies, the European Commission forecast.
The budget shortfall for the 16 nations that share the euro will widen to 6.9 per cent of gross domestic product next year from 6.4 per cent in 2009, and ease to 6.5 per cent in 2011, the
Brussels-based commission, the European Union’s executive, said today in its semi-annual economic forecasts. Spain, Greece and Ireland will all have deficits of 10 per cent or more this year and next. Overall government indebtedness will rise to 84 per cent of GDP in 2010 and 88.2 per cent the following year.
However, the European Commission said the euro-area economy may expand 0.7 per cent next year, raising its forecast even as budget deficits and jobless ranks swell further. The EC previously forecast a 0.1 per cent contraction in 2010..
The economy of the 16 countries sharing the euro will resume growth in 2010 and expand 1.5 per cent in 2011, after contracting 4 per cent this year, the Brussels-based commission the European Union’s executive, said today in its semi-annual economic forecasts.
The widening deficits threaten to push up borrowing costs as governments plan to extend stimulus measures until 2011 on concern that recovery from the worst recession in 60 years is unsustainable without them.
All euro-region countries and most of the other EU members will breach the bloc’s deficit limit next year, the commission said. EU rules require deficits to stay below 3 per cent of GDP.
“Once the underlying recovery has gained sufficient traction, i.e. in 2011, a period of fiscal consolidation will have to follow to put public debt back on a sustainable footing,” the commission said in the report.
EU finance chiefs said on October 1st that they probably will not withdraw stimulus programs before 2011. Governments should start to tighten policy once economic growth “takes hold,” EU Monetary Affairs Commissioner Joaquin Almunia said the same day.
Concern that widening budget gaps will overburden governments with debt and hamper economic growth is making investors wary of the higher-spending EU countries. The extra interest demanded to hold Greek, Irish and Spanish debt instead of German equivalents has more than quadrupled since the start of 2008.
Germany designed the EU’s deficit rules in the 1990s to boost confidence in the euro, before embracing French calls for a relaxation after its own deficits started swelling above the limit in 2002.
The rules were loosened in 2005, making it easier for countries breaching the limit to avoid punishment.
Nations that top the deficit ceiling can be subject to economic sanctions, though none has so far been fined. Germany, France and Greece all exceeded the limit in 2004 but were not penalised.
Bloomberg