The euro zone economy is likely to grow almost twice as fast this year as previously thought and is now on solid ground, the European Commission said today.
In its twice-yearly interim economic forecasts for the 27-country EU and the 16 countries using the single currency, the EU executive said it now expected the euro zone to grow by 1.7 per cent this year, rather than the 0.9 per cent it forecast in May.
"We now have solid ground under our feet. We have started scoring again, but there is no reason to shout for victory. We must remain alert and vigilant," economic and monetary affairs commissioner Olli Rehn told a news conference.
He called for more wage moderation in Italy, more fiscal consolidation in Portugal, structural reforms in France, including pensions, and continued fiscal tightening in Ireland.
"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."
"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," he added.
The cautious optimism contrasted with comments in Oslo by International Monetary Fund managing director Dominique Strauss-Kahn, who said there was a mood of uncertainty hanging over the European economy.
The forecast is in line with projections by the European Central Bank, which said on September 2nd it expected euro zone growth to be between 1.4 and 1.7 per cent this year.
The Commission said risks to its forecasts were broadly balanced. Among the negative risks, it saw high debt levels and lingering tensions in sovereign debt markets. On the other side, it listed spillovers from fast German growth to other EU countries and stronger domestic demand.
"The European economy is clearly on a path of recovery, more strongly than forecast in the spring, and the rebound of domestic demand bodes well for the job market," Mr Rehn said. "However, uncertainties remain and safeguarding financial stability and continuing fiscal consolidation remain key priorities."
The forecasts added to a chunk of data in the past month which have shown the European upturn may be stronger and more resilient than earlier expected.
But while markets' concerns in recent weeks have been focused on the chances of renewed recession in the United States, economists are still forecasting the US economy will grow faster than Europe as budget cuts kick in across the bloc.
Mr Rehn said structural reforms in Europe should be frontloaded to help sustain growth and job creation as the economy emerges from a deep slump caused by the financial market crisis.
The Commission forecast that in the third and fourth quarter of 2010, the euro zone economy would grow 0.5 per cent quarter-on-quarter and 0.3 per cent respectively after a 1 per cent expansion in the second quarter.
It said private investment and consumption had contributed more to GDP growth in the second quarter than net exports and inventories and that such rebalancing boded well for the second part of the year, when demand from euro zone exports is likely to be smaller.
The EU as a whole is also likely to see much stronger economic expansion of 1.8 per cent in the whole of 2010, rather than the 1.0 per cent estimated in May and up from a 4.2 per cent contraction in 2009, the Commission said.
The Commission almost tripled its forecast for German gross domestic product growth to 3.4 per cent from 1.2 per cent for 2010 and raised its projections also for France, Italy and the Netherlands and saw a smaller economic contraction in Spain.
Despite the stronger growth, euro zone inflation was likely to be slower than previously expected, it said. It forecast euro zone 2010 inflation at 1.4 per cent year-on-year, down from 1.5 per cent seen in May, although up from 0.3 per cent in 2009.
Reuters