EU Cuts Euro-Area Inflation Forecast, Warns Nations on Debt

  • CPI will average 0.2 percent in 2016, European Commission says
  • Spain and Italy in spotlight as growth predictions cut

The European Commission told the euro area’s largest economies to reduce debt and modernize labor markets as it again slashed its inflation forecast and warned of slower-than-predicted growth across the 19-nation bloc.

France, Spain and Italy, which have persistently failed to hit European Union budget targets, are still off track, the Brussels-based commission said on Tuesday. Gross domestic product in the currency area will increase by 1.6 percent this year and 1.8 percent in 2017 -- both 0.1 percentage point lower than the commission forecast in February. Inflation will average 0.2 percent this year, below the European Central Bank’s target.

“Decisive policy action to reform and modernize our economies is the only way to ensure strong and sustainable growth, more jobs and good social conditions,” European Commission Vice President Valdis Dombrovskis said in a statement. “High levels of public and private debt, vulnerabilities in the financial sector or declining competitiveness” remain the biggest problems.

Six years since Greece received its first international bailout, the scars across the wider euro area remain unhealed. Nations have been unable to narrow deficits and scale back debt to EU-agreed limits and economic output lags behind the U.S.

Even as the ECB uses a mix of low or negative interest rates in addition to 80 billion euros ($92 billion) per month in asset purchases, inflation is expected to be less than half the 0.5 percent the commission predicted in February when it last issued forecasts, and below the ECB’s goal of just under 2 percent. It will average 1.4 percent in 2017, the commission said.

Inflation is expected to remain very low “for a longer period than previously forecast,” European Economic Affairs Commissioner Pierre Moscovici told reporters in Brussels. With “gradually increasing energy prices, inflation is expected to step up in the second half of this year,” he said.

Spanish Targets

Political and social upheaval triggered by the biggest influx of refugees since World War II, the possibility of the U.K. leaving the EU, an aggressive Russia, the rise of anti-establishment parties and terrorism in its biggest capitals provide a tumultuous backdrop to Europe’s economic fatigue.

“There are heightened geopolitical tensions in Europe’s immediate neighborhood and farther afield and there is serious uncertainty within Europe,” Marco Buti, the commission’s director general for economic and financial affairs, said in a statement accompanying the economic forecasts. “Although it stems from various domains and circumstances, much of it relates to the same broad theme, namely the capacity and the continued willingness to find and implement common solutions to common challenges.”

The commission confirmed its forecast that Spain, with a caretaker government since December, will miss its deficit-reduction goal for a ninth straight year in 2016, meaning the nation could become the first to receive a financial penalty from the EU.

Its deficit will be 3.9 percent of GDP in 2016 and 3.1 percent in 2017, still exceeding the EU’s 3 percent ceiling, the commission said, and wider than the 3.6 percent and 2.6 percent it forecast in February. The commission cut its forecast for Spanish GDP growth in 2016 to 2.6 percent from the 2.8 percent it predicted in February.

In March, the EU warned Spain that it needed to “take measures to ensure a timely and durable correction of the excessive deficit” and to submit a detailed plan of how it was to do so. The commission has the power to fine countries that persistently breach their deficit commitments up to 0.2 percent of GDP and send troika-style inspectors to scrutinize national officials. EU commissioners are scheduled to take a decision later this month.

Italy -- which has the highest mountain of debt per GDP in the euro area after Greece -- is also under scrutiny. The commission forecasts Italy’s public debt to be 132.7 percent of GDP in 2016, representing no decline from 2015. That’s more than double the EU’s 60 percent threshold.

The commission downgraded Italy’s growth forecast to 1.1 percent in 2016 from the 1.4 percent it predicted in February.

Italy is also under pressure because its structural deficit -- stripping away one-time payments and the effects of the business cycle -- is widening to a forecast 1.7 percent of GDP in 2016 from 1 percent in 2015.

France, the euro area’s second largest economy, which the commission warned in March about its increasing public debt and worsening productivity growth, will also continue to expand more sluggishly than the bloc as a whole. The commission forecasts growth of 1.3 percent of GDP in 2016 and 1.7 percent in 2017.

‘Determined Action’

France’s public debt will spiral to 97 percent of GDP in 2017 from 96.4 percent in 2016 and 95.8 percent in 2015, according to Tuesday’s forecast.

“The recovery in the euro area remains uneven, both between member states and between the weakest and the strongest in society,” Moscovici said in a statement. “That is unacceptable and requires determined action from governments, both individually and collectively.”

The euro-area’s unemployment rate, which is slowly declining from record levels, is forecast to fall to 9.9 percent in 2017, from 10.3 percent in 2016 and 10.9 percent in 2015.

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