Eurozone growth outlook worsens amid economic headwind, Brexit fears

The European Commission lowered its expectations for growth in the eurozone on Tuesday, pointing to a challenging global environment as heavyweights France and Spain struggle to get their deficits in line with EU targets.

The euro currency bloc has had trouble revving up its economic engine ever since emerging from recession in 2013 and has contended with high unemployment and low inflation.

The eurozone economy is expected to expand by 1.6 per cent this year and 1.8 per cent in 2017, the commission said in its spring economic forecast, lowering its 2016 growth predictions by 0.1 percentage points for the second time this year.

"The economic recovery in Europe continues but the global context is less conducive than it was," commission Vice President Valdis Dombrovskis said in a statement.

Risks include a Chinese economic slowdown and geopolitical tensions, as well as uncertainty within the European Union ahead of Britain's looming referendum on EU membership, according to the bloc's executive.

Britain, the EU's second largest economy, will hold a referendum on June 23 on whether it will remain in the 28-member bloc. Though Britain is not a member of the eurozone, a vote in favour of a so-called Brexit could bring years of uncertainty for the euro economies while London negotiates its new relationship with Brussels.

The commission also warned that a rise in the value of the euro and rebounding oil prices could put a damper on the eurozone economy, despite a monetary policy that is favourable to investment.

"Future growth will increasingly depend on the opportunities we create for ourselves," Dombrovskis said, calling on member states to step up efforts to reform their economies and tackle debt.

Spain, in particular, looks set to miss its economic goals. The commission expects its deficit to hit 3.9 per cent of gross domestic product (GDP) this year - more than forecast by Madrid - and 3.1 per cent in 2017.

"Some efforts ... are still to be made," EU Economy Commissioner Pierre Moscovici said. Spain had been given until this year to meet the EU-recommended deficit ceiling of 3 per cent of GDP.

But the country has been in a political limbo since inconclusive elections in December, with a new round of polls now set for June.

The commission will later this month issue its annual economic recommendations to the EU's member states.

Eurozone countries who do not comply with EU budget rules - including a debt ceiling of 60 per cent of GDP - are at risk of a hefty fine, although Brussels has so far never used such sanctions.

France will also have to undertake further efforts, Tuesday's projection shows, with a 3.4-per-cent deficit expected this year and 3.2 per cent in 2017 if its policies are unchanged.

Paris is supposed to bring its budget shortfall in line with EU rules by 2017, after having been granted three deadline extensions.

Moscovici was confident that France could make the necessary adjustments.

"I believe that the 2017 target is utterly doable," he said, adding that this is only possible if France maintains a "serious" cap on its public finances.

Portugal, meanwhile, is on a more positive trajectory after being warned earlier this year to bring its budget in line. Lisbon is on track for a 2.7-per-cent deficit this year and 2.3 per cent in 2017.

The commission lowered its eurozone inflation outlook, predicting that the cost of living would only increase by 0.2 per cent in 2016 and by 1.4 per cent in 2017 - below the European Central Bank's inflation target of almost 2 per cent.

Last update: Fri, 24/06/2016 - 08:49

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