EU Says Euro-Area Growth to Weaken in 2011 as Crisis Still `Casts Shadow'

Europe’s economy may weaken next year as budget cuts to stem a mounting debt crisis hurt consumer demand and faltering global expansion curbs exports, the European Commission said.

Gross-domestic-product growth in the 16-nation euro region may weaken to 1.5 percent in 2011 from 1.7 percent this year, the Brussels-based commission said in a report published today. While Germany may expand 3.7 percent this year, the economies of Ireland, Greece and Spain will continue to shrink.

The recovery is “making progress,” though the “shock of the global crisis still casts its shadow over the economy,” the commission said. “The level of uncertainty for the outlook continues to be very high.”

Ireland yesterday became the second euro nation to receive external aid as governments seek to stem a debt crisis that pushed up borrowing costs and clouded the economic outlook. While growth remains “fragile and uneven,” Germany will continue to power the region’s recovery, the commission said.

“Investors remain concerned,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “Without Germany, the growth picture would be rather bleak.”

The euro was little changed after the report, trading at $1.3176 at 12:09 p.m. in Frankfurt, down from $1.3242 yesterday.

German Surge

Recent data indicate the slowdown in the pace of the recovery may be modest. Economic confidence surged to the highest in three years in November, the commission said in a separate report today. German executive sentiment increased to a record and growth in Europe’s services and manufacturing industries accelerated.

In Germany, Europe’s largest economy, GDP will increase 2.2 percent in 2011, today’s report showed. In France, the economy may expand 1.6 percent this year and next, while Italian GDP may rise 1.1 percent in both years.

In 2011, Greece and Portugal will be the only two euro- region economies showing a contraction, the commission said. Ireland’s economy may expand 0.9 percent.

“This recovery is uneven, an many member states are going through a difficult period of adjustment,” European Economic and Monetary Affairs Olli Rehn said in a statement. The commission said that “lingering concerns about fiscal sustainability” are “among the most important challenges.”

Debt Risks

Ireland’s 85 billion-euro ($112 billion) aid package is aimed at quelling market turmoil that’s threatening to spread to countries including Portugal and Spain. The EU also yesterday told Greece, which received a bailout earlier this year, it could have an extra four-and-a-half years to repay its loans.

“A replay of the negative feedback loop between rising sovereign risk premia, banks’ ability to lend and economic growth prospects cannot be excluded,” the commission said, adding “we do not think” such a scenario is likely.

European Central Bank council member Christian Noyer said in Tokyo today that the economic recovery remains “well on track” and the region isn’t facing a confidence crisis.

European stocks rose today, with the Stoxx Europe 600 Index gaining as much as 0.8 percent. The premium investors charge to hold Irish 10-year bonds over benchmark German bonds fell 8 basis points to 638 basis points. It reached a record 656 basis points on Nov. 26, almost triple the spread four months ago.

Export Demand

European companies have been forced to rely on faster- growing economies to boost sales as budget cuts discouraged consumer spending at home. Porsche SE, the German maker of the 911 sports car, said on Nov. 24 that operating profit surged more than sevenfold in the quarter through October.

Export demand helped fuel the region’s fastest growth in four years in the second quarter, with the economy expanding 1 percent. Growth weakened to 0.4 percent in the third quarter.

“The growth spurt seen in particular in the second quarter of this year was exceptional and not likely to last,” the commission said. Still, “we see a welcome broadening of the basis for the recovery, with domestic demand coming to the fore, and the recovery increasingly becoming self-sustained.”

While the euro dropped against the dollar in the first half of the year as the Greek crisis undermined the currency, it’s gained 11 percent since falling to a four-year low in June, making exports less competitive just as a global growth weakens.

The Organization for Economic Cooperation and Development on Nov. 18 lowered its global growth forecast for next year to 4.2 percent from 4.5 percent and forecast a “soft spot.” The euro-region economy may grow 1.7 percent this year and next, lagging a U.S. expansion, the Paris-based group forecast.

The U.S. Federal Reserve on Nov. 3 decided to purchase $600 billion in Treasury securities to stimulate the world’s largest economy. The ECB has purchased government bonds and extended emergency liquidity for banks into 2011 to help restore investor confidence in the currency region.

The Frankfurt-based central bank will release its latest economic forecasts for this year and next on Dec. 2.

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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