On 3 November the European Commission has published its autumn economic forecast 2008-2010 which shows that the EU economies are strongly affected by the financial crisis. Joaquín Almunia, the European commissioner for economic and monetary affairs, said that the EU’s economic "horizon is as dark as November weather in Brussels." The European Commission acknowledged that the impact of the financial crisis has been bigger than expected. According to the EuropeanVoice, Joaquín Almunia, said the interdependence of the global economy is “bigger than we thought, leading everybody to suffer.”
Both the EU and the euro area GDP have declined in the third quarter of 2008. According to the European Commission whereas the EU economic growth in 2007 was 2.9% it would be in 2008 1.4%. The EU economic growth is expected to drop even more in 2009 to 0.2% before recovering progressively to 1.1% in 2010. The figures for the euro area for the same period are: 1.2%, 0.1% and 0.9% whereas in 2007 it was 2.7%.
According to the European Commission “the outlook remains bleak further ahead, with several of the EU economies in or close to a recession.”
According to the European Commission growth in the UK economy is expected to slow to 0.9% in 2008. In 2009, the Commission projects that the UK’s economy would contract by 1 per cent followed by a slow recovery in 2010.
In 2008, Estonia and Latvia GDP will fall by of 0.3% and 0.8%, respectively and in 2009 they will be hit with -1.2% and -2.7%. In the eurozone, Ireland’s GDP will drop by 1.6% in 2008 and again by 0.9% in 2009. In 2009, Spain is expected to register a 0.2% decline in GDP. The Commission has also predicted zero growth, in 2009, for Germany, France and Italy.
The Commission has also foreseen a drop in investment and consumption.
Therefore, due to this slow growth, employment is expected to increase, only marginally, in 2009-2010, by about ¼ million jobs in the EU and ½ million in the euro area and the unemployment rate is projected to rise by about 1 pp. The employment rate is expected to be 7.8% in the EU and 8.4% in the euro area in 2009.
The Spanish situation will be particularly serious where the unemployment rate will reach 13.8% in 2009 and 15.5% in 2010. In the UK the unemployment rate is expected to be, in 2009, 7.1%.
According to the Commission the deficit in the general government balances would increase from less than 1% of GDP in 2007 in the EU to 1.6% in 2008, 2.3% in 2009 and 2.6% in 2010. The deficit, in the euro area, is expected to rise to 1.3% in 2008, 1.8% in 2009 and 2% in 2010. The Commission has stressed “After reaching the best position since 2000, the overall budgetary position is also set to deteriorate while the rescue packages could raise public debt.”
According to the Commission projections eight countries, including the UK, Ireland France, Latvia, Lithuania, Romania and Hungary, may exceed the 3% of GDP cap imposed by the Stability and Growth Pact. The UK deficit will hit 5.6% of GDP by 2009 and 6.5% in 2010.
Nevertheless, there are positive news, inflation is expected to fall rapidly to below in the EU to 2.2% in 2009 and 2.4% in 2010 and in the euro area to 2.2% and 2.1%.
The Commission has pointed out that this “forecast is surrounded by considerable uncertainty and downside risks.”
According to Joaquín Almunia "We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector. The Commission last week set out a framework for recovery that aims to boost investment, sustain employment and demand.” The Commission has recently approved a communication whose title is "From financial crisis to recovery: A European framework for action" which is its contribution on how to respond to the current financial crisis. But on 26 November the Commission will present a “comprehensive recovery plan.” José Manuel Barroso has said "This is time for solidarity."
According to the Commission financial institutions such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) should be strengthen. The Commission wants to raise the capital base of the European Investment Bank (EIB). Each member state contributes to the bank annual capital which is around €165 billion. The capital of the EIB was scheduled to be increased in 2010. Obviously, the member states are not willing to increase their commitments at this stage.
Almunia has reiterated that the Stability and Growth Pact is the appropriate policy framework for the EU however he said that the pact will be interpreted flexibly. It seems that the Commission would allowed budget deficits to exceed 3% of GDP provided the deviation is small and temporary.
The Commission will also propose to raise the maximum amount available within the present financial facility used to provide loans to EU member states facing difficulties. It would be raised from €12 billion to €25 billion.
The Commission is planning to review to use of the funds available in the EU budget for the cohesion policy as well as the globalisation fund. Mr Barroso has said "We must keep unemployment to the absolute minimum and support those who have lost their jobs. We will review how we can reinforce the effectiveness of the globalisation adjustment fund." The European Commission is considering expanding the scope of the European Globalisation Fund. The European Commission "will explore the scope for accelerating investment projects and for bringing forward payments to member states.”
