The Commission’s latest forecasts make grim reading for the EU’s struggling economies

Olli Rehn, the European commissioner for economic and monetary affairs and the euro, issued a gloomy forecast about economic performance in the European Union on Friday (11 May) – but he insisted that there could be no alternative to the path of austerity.

The eurozone, where gross domestic product (GDP) is expected to decrease by 0.3%, is in recession and is not expected to start to recover until the second half on this year. The European Commission's spring economic forecast made particularly dismal reading for countries struggling to get their budget deficits under control. For Spain, where the economy is expected to contract by 1.8% in 2012, the Commission predicted “difficult times ahead”. Spain's deficit is now expected to be 6.4% of GDP, a long way above the government's target, agreed with the EU, of 5.3%.

Next year, the Commission predicts it to be barely reduced, at 6.3%, well above what is supposed to be a celing of 3%. The deficits of Greece, Portugal and France are all also likely to be larger than previously forecast. Rehn said that all the predictions were based on the assumption that government policies would not change – and that Spain's outlook could alter once the plans of the country's autonomous regions were confirmed. “The Commission has full confidence in the determination of the Spanish government to meet the fiscal target in line with the [stability and growth] pact,” Rehn said. “For Spain, the key to restoring confidence and growth is to tackle the immediate fiscal and financial challenges with full determination.

This calls for a very firm grip to curb the excessive spending of regional governments.” Luis de Guindos, Spain's economy minister, responded by saying that the country remained committed to the 5.3% target for this year and 3% for 2013. The latest forecasts for the EU and eurozone are worse than those predicted in the last report, in autumn 2011, but Rehn said that this was no reason for governments to stray from their austerity programmes. “We cannot pile debt over debt,” he said. “It is essential that we are continuing fiscal consolidation and in parallel boost growth by targeted investments.”

French challenges

François Hollande, France's president, said that he was aware of the worse-than-forecast deficit figures and blamed the former administration. “I've known for several weeks that there's been a worse deterioration of our public accounts than what the outgoing government has said,” he said on Friday. “Now we have the confirmation, and it's worth looking at and analysing. I will wait for the report from the Cour des Comptes [France's national audit office, expected at the end of June] before taking the necessary decisions.”

GDP is expected to stagnate across the EU as whole this year, contracting by 0.3% in the eurozone. Next year, growth is expected to return: it is forecast at 1.3% in the EU and 1% in the 17 countries of the eurozone. Rehn said that the recovery would be slow and “uneven” across member states. Unemployment is expected to remain at 10% in the EU and 11% in the eurozone, while inflation is forecast to edge down.

“A recovery is in sight,” Rehn said. “But the economic situation remains fragile, with still large disparities across member states.” Rehn said that there was “an ongoing adjustment of the fiscal and structural imbalances built up before and after the onset of the crisis”, and that this had been made worse by continuing weak economic sentiment.