There was no let-up from gloomy news in Europe, as the European Commission has slashed already tepid growth forecasts for the euro zone and warned of recession in several countries. For the next year, the EC growth forecast for the 17-country bloc is only 0.5%, sharply down from its former estimate of 1.8%.
The downward revision is the result of a slower-than-expected growth in the “core” economies of the region. Germany is now forecast to grow only 0.8% (down from 1.9%); while France is expected to limp towards 0.6% growth (down from 2%).
Germany’s role as Europe’s industrial powerhouse means the slowdown of its economy has particularly worrying implications for the euro zone. But the country in the spotlight today was Italy, given the dramatic rise in its bond yields over the last few days. The commission forecast for Italy was reduced to just 0.1% growth in 2012 compared to an earlier estimate of 1.3%.
Olli Rehn, the EU’s economic chief, tried to ally fears that Italy was the next country in line to require a bailout, by insisting that Rome was able to bear higher financing costs due to the relative long maturities of its bonds —seven years on average — which reduced its needs for immediate financing.
Italy’s most important task ahead, he said, was to restore political stability and its “capacity of decision making”. Earlier this week, Italian Prime Minister Silvio Berlusconi agreed to step down after having lost his parliamentary majority, but the details and timing of his succession still remain unclear. Also in doubt is the ability of the country to undertake far reaching structural reforms deemed necessary to restore market confidence in it.
Rehn criticised Italy for its silence on issues such as “the need to redistribute the fiscal burden away from labour, away from employees and workers, toward consumption and immovable property”.
The commissioner described the EC’s latest forecast as “the last wake-up call”. “Growth has stalled in Europe, and there is a risk of a new recession,” he said. The effects of a double-dip recession in Europe are unlikely to be limited to the region, with spillover effects roiling the entire global economy.
