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Ernst & Young Reduces Euro-Area GDP Forecast on Austerity

Ernst & Young LLP said the euro-area economy will probably contract more this year than it previously predicted as governments across the region reduce budget deficits.

Gross domestic product among the 17 countries that share the single currency is set to shrink 0.5 percent in 2012, compared with the 0.1 percent decline forecast in December, Ernst & Young’s Mark Otty, based in London, wrote in the company’s spring forecast for the region published today.

Countries from Greece to the Netherlands are implementing tax increases and spending cuts to help stem deficits amid the region’s sovereign debt crisis, now in its third year. The cuts will collectively reduce euro-area GDP by more than 1 percentage point in both 2012 and 2013, Ernst & Young estimated.

“Whether this is self-inflicted damage or the unavoidable precondition to sustainable recovery is the source of much macroeconomic and political debate,” wrote Otty, who is managing partner for Europe, the Middle East, India and Africa.

Both governments and companies in Europe face “the key challenge” of finding liquidity this year, Otty said. States will need to roll over about 1.1 trillion euros ($1.4 trillion) of debt in 2012, while companies seek to refinance 1.4 trillion euros, Ernst & Young estimated.

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