Usually the Commission’s interim economic forecast is published in February but because of the crisis and the “the exceptionally rapid deterioration in the economic situation and outlook since the autumn” the Commission has decided to brought it forward. On 19 January the European Commission has published its interim forecasts for 2009-2010.
According to the Commission GDP growth in the European Union is expected to fall by 1.8 % in 2009 and 1.9% in the euro area. It should be mentioned that last November the Commission, in its autumn forecasts, has foreseen growth of 0.1% in 2009. The Economic growth is estimated to have dropped from just below 3% in 2007 to about 1% in 2008 in both the EU and the euro area. According to the European Commission, the UK GDP is expected to shrink by 2.8%. Alastair Darling has not foreseen such a bad picture for the UK.
Moreover, the Commission foresees that the EU employment will fall by 3.5 million jobs. Consequently, the unemployment rate is expected to increase to 8.7% in the EU and 9.25% in the euro area in 2009 with a further increase in 2010.
According to the Commission public finances will suffer from the reversal of past revenue windfalls and from the impact of discretionary measures adopted by member states which amount 1% ofGDP for 2009. In 2009, public debt will grow in almost all Member States. The euro area’s public debt was 68.7% in 2008 and it is foreseen to rise to 72.7% in 2009 and 75.8% in 2010. Under, the Stability and Growth Pact (SGP)member states have to work to reduce public debt to and/or maintain total public debt at 60 percent of GDP.
The EU Governments have been injecting hundreds of billions into their economies and financial sectors obviously several Member States are expected to breach the 3% of GDP deficit threshold. According to the Commission the euro area’s budget deficit is expected to rise to 4.4% of gross domestic product in 2010 from 4% in 2009 and 1.7% in 2008. The Commission has forecasted the UK deficit to reach 8.8% in 2009 and 9.6% in 2010. The Commission has called for the EU Member States to increase spending but they are still required to respect the EU's fiscal rules. The Commission will continue to use excessive deficit procedure (EDP) if the 3% of GDP deficit threshold is breached unless the excess was “close and temporary." Joaquín Almunia, the EU economic affairs commissioner, said: “Close means a few decimals, not many decimals.” The Commission may launch excessive deficit procedures against several member states. The Commission is expected to adopt its recommendations on the issue on 18 February.
Moreover, consumer-price inflation is expected to fall from 3.7% in 2008 in the EU and 3.3% in the euro area to 1.2% in 2009 and 1.0% in the eurozone respectively. In 2010, it is foreseen that will fall just below 2% in both areas.
Joaquín Almunia has said "We are predicting a recovery from the third quarter of this year but this depends on a recovery in the financial markets," as well as “(…) on the full and rapid implementation of the stimulus packages.” According to the Commission we can only expect an improvement on the economic and financial situation on the second half of 2009. However, according to Almunia the situation may not improve if the economic recovery plans are badly implemented. He has pointed out that 17 Member States have already approved rescue plans nevertheless just two objectives have been achieved which are the stabilization of the financial markets and stimulation of interbanking loans. However, it has not been achieved yet restoring flows of credit to the real economy.
The EU finance ministers met on 20 January to discuss the economic and financial crisis chiefly the European recovery plan for growth and jobs planning to drive a coordinated EU response to the economic crisis, agreed at the European Council last December. The Recovery Plan calls for a co-ordinated fiscal stimulus of €200 billion equivalent to 1.5% of the EU´s GDP. Around €170 billion (1.2% of GDP) would come from Member States national budgets and €30 billion (0.3% of GDP) would come from the EU budget and from the European Investment Bank. The EU leaders have approved the €200 billion European economic recovery plan proposed by the European Commission, but differences remain over the tools and the level of public spending. There are still deep differences over how best to respond to the current economic downturn. The plan provides for European and/or national support measures. At its next scheduled meeting, on 19 and 20 March, the European Council will assess how well the recovery plan has been implemented, and may add to it or adapt it as necessary.
According to the Ecofin Council Conclusions, the EU finance ministers have stressed "The decisive actions taken by European governments last autumn have contributed to the stabilization of financial markets. The economic situation, however, is deteriorating fast, and the latest Commission forecast shows that we are now facing a deeper economic downturn, which is expected to continue throughout the first half of this year.”
As well as the European Commission the EU finance ministers also consider that the real economy is still suffering from difficult access to credit. According to Jean-Claude Juncker, Eurogroup president,. “The fiscal stimulus packages launched by most governments will not lead to results if the banking sector fails to meet the challenge it faces.” Moreover, he said “we reiterate our call to the banking sector. It should do its job when companies, in particular small and medium-sized businesses, call upon the banking sector to lend money.”
The EU finance minister have debated the budgetary policy to be followed in this period of crisis as the recovery plans entail increased public expenditure. The EU Finance Ministers have recognized that that budget deficits will increase in several Member States which may breach the deficit reference value. But they stressed that “The Stability and Growth Pact provides adequate flexibility to deal with these exceptional situations.” The Council has stated that “the adjustment path and recommendations will take into account this exceptional situation, as well as differences in fiscal space.(…).”
The main focus of the Ecofin Council debate was how to find the balance between letting deficits grow as a result of the recovery plans to face the recession with a return to budget discipline over the medium and longer term. According to Mirek Topolanek, the Czech prime minister, “The EU is split, in its usual way, between countries that want to stick to the rules and countries that want to breach them in tough times. It is clear at this point that the discussion will be very stormy.” Austrian Finance Minister Josef Proell has said "A crisis that arose out of (too much) debt cannot be fought by creating more debt over the long term."
All ministers have agreed that the Stability and Growth Pact must be respected, moreover, the ministers said “We are all committed to return to our consolidation path towards medium-term budgetary targets as soon as possible, keeping pace with the economic recovery.” Moreover, they stressed the “The coordinated fiscal stimulus willthus be followed by a coordinated budget consolidation." However, Czech Finance Minister Miroslav Kalousek has pointed out "All members said that they should return to fiscal consolidation as soon possible. The question is how long will this take." The ministers have not committed to a clear deadline.
The Czech EU presidency has presented the EU finance ministers with a plan for budget consolidation. The Czech EU Presidency is insisting on the coordination of national measures to be taken in order to reduce budgetary deficits in the medium term.
The Ecofin Council also discussed the issue of the liability of fund depositaries under Directive 85/611/EEC on undertakings for collective investments in transferable securities (UCITS) at the request of France. According to French Minister Christine Lagarde there are different interpretations of the directive, consequently the protection afforded to investors differs from one member state to another. France has complained to the Commission about loss of deposits in Luxembourg as there fund managers may take advantage of softer regulation therefore they are only required to return part of the funds whereas in France they are required to return it completely. The European Commission will open an investigation into how the EU Member States have implemented the UCITS. According to Euractiv, Oliver Drewes, spokesperson for Internal Market Commissioner Charlie McCreevy, has said, "If it turns out that there is a need to supplement these principles, the Commission will take the lead by coming forward with the necessary actions, including a binding set of guidelines or far-reaching harmonisation of the legislation." Moreover, he said “An infringement procedure is always possible.”
