EU ECONOMICS commissioner Olli Rehn has urged the Government to continue its austerity drive in next year’s budget, saying the “formidable” challenge of resolving the banking crisis should not push it off course.
Mr Rehn was speaking as the EU executive upgraded its growth forecasts for the European and euro zone economies, but he conceded he was “worried” about the situation in sovereign debt and financial markets.
Boosted by the speedy economic recovery in Germany, the commission increased its EU gross domestic product (GDP) growth forecast by three-quarters of a point to 1.8 per cent and its euro zone forecast by a similar amount to 1.7 per cent.
“The economic recovery in the EU, while still fragile, is progressing at a faster pace than previously envisaged,” the commission said in its interim economic forecast.
“While a moderation of EU GDP growth in the second half of the year is still foreseen, some momentum from the second quarter should feed through to the following quarters, lifting the previously expected quarterly profile somewhat.”
There was no specific commentary on Ireland in the projections, which dealt mainly with the seven largest EU economies. However, Mr Rehn acknowledged close contacts between the Government and the commission over the “financial repair” issues arising from Anglo Irish Bank.
“The Irish Government has convincing plans to complete the financial repair in Ireland, which, as we well know, unfortunately, is going to be quite costly,” Mr Rehn told reporters.
“The Irish Government is currently reflecting steps in fiscal consolidation and I see that it’s very important that Ireland will maintain its rigorous approach as regards public finances, despite this formidable challenge now because of the financial repair.”
While his remarks come as the Government prepares in the coming weeks to make its assessment of the cost of closing Anglo, the commissioner did not directly respond to the question of whether the more extreme estimates would be manageable from the perspective of taxpayers.
He said the European economy was on the path to recovery but uncertainties remained and it was still a priority to continue with fiscal consolidation.
Mr Rehn said the European authorities have been able to calm financial markets to an extent but “not completely, and that’s never achieved completely”.
The forecast deals with France, Germany, Italy, the Netherlands, Poland, Spain and Britain, which together represent some 80 per cent of the European economy.
“Real GDP growth for both the EU and euro area surprised markedly on the upside in the second quarter of 2010,” it said.
“This strong performance stemmed from an export-driven industrial demand, in line with the continued strong dynamics of global growth and trade in the first half of the year.”
The forecast also pointed to signs of a revival in domestic demand, including in private consumption. This was particularly so in Germany, where GDP is now forecast by the commission to rise by close to 3.5 per cent this year.
