In euro zone, clouds still mask silver lining

Marcelo del Pozo/Reuters - A man asks for alms in the Andalusian capital of Seville, Feb. 22, 2013. Spain has made an effort to cut its budget gap and the country's economic growth turned out weaker than expected, an E.U. commissioner said, signaling Madrid might get more time to cut its budget gap.

The euro-zone economy faces at least another year of recession and rising unemployment, European officials reported Friday, with some major nations expected to miss their government deficit targets despite painful rounds of cost cutting.

Separately, the region received further bad news when the Moody’s rating agency stripped the United Kingdom of its AAA rating — a step other firms may follow in coming days. That could increase the country’s borrowing costs and make it more difficult to meet its budget goals. Moody’s said in its U.K. assessment it expected that “sluggish growth . . . will extend into the second half of the decade.”

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The latest forecast from the European Commission attempted to strike an overall positive tone, noting that the threat of a euro-region breakup seems to have been avoided and that financial markets have stabilized. The region’s overall economy should begin growing again — however slowly — by the end of the year.

But the report’s major findings and its detailed look at individual nations showed the stress still battering the 17-nation currency union, a major economic region that has been a drag on world growth for the past three years.

The region’s fate has been a preoccupation of the Obama administration, which has often cited Europe as the chief risk facing the global economy. The profits of U.S. businesses have been hit by declining sales in Europe, and companies such as Ford have been scaling back their industrial presence in the region. Obama recently agreed to open free-trade talks with the European Union in hopes of boosting growth on both sides of the Atlantic.

Since a looming sense of crisis first took hold in Greece, a country that has flirted with default several times since late 2009, the area has been locked in a debate over the need for government austerity vs. the human cost of scaling back Europe’s extensive array of social, health and pension benefits. Most governments have been reducing spending or raising taxes to battle the debt crisis and meet strict deficit targets. But recession and rising unemployment have highlighted the tangled nature of Europe’s choices. Even nations such as France that are feeling the pain of strict fiscal medicine are not likely to meet their deficit targets, the commission reported.

Budget cutting in places such as France, as well as the deeper troubles faced in Spain and bankrupt Greece, “are continuing to weigh on growth,” said Olli Rehn, commission vice president. Still, “we must stay the course,” Rehn said, arguing that the changes being made in the euro region and the budget measures being taken by governments are “paving the way for a return to recovery.”

When a turnaround will happen, however, remains in doubt. Recent data have shown that the region’s economy fell faster than expected at the end of 2012, and organizations such as the International Monetary Fund and now the commission have written down their forecasts for 2013.

In the analysis released Friday, the commission said it expects the euro currency zone to contract 0.3 percent this year. The hope, however, is that the region’s recession is easing and growth will resume toward the end of the year — particularly if the United States and other major parts of the world pick up. The commission expects the euro zone to grow 1.4 percent in 2014. The larger European Union, which includes the United Kingdom, is expected to grow this year — but barely, at 0.1 percent. The United States, by contrast, is expected to expand 1.9 percent this year.

Even those numbers could prove optimistic as the region struggles with the social and political fallout from three years of financial and economic turmoil.

Unemployment is expected to continue rising through the year, to 12.2 percent from 11.4 percent, with pressure likely to mount for more spending or social assistance if recovery does not occur as expected.

Elections could shape the economic outcome as well — including an Italian vote this weekend that may see the departure of Prime Minister Mario Monti, credited with helping stabilize Italy’s finances at a critical point last year.

Although the region’s political leaders have set up several large new programs to keep the euro zone intact, key issues remain unresolved, including the extent and timing of a proposed banking union that many analysts say is needed to put the euro crisis more fully to rest.

And, the report made clear, it isn’t certain yet that Europe has even successfully conquered its debt problems.

Because of its sub-par growth, France is expected to miss its deficit targets for the year. Spain, meanwhile, a country whose economic overhauls have been rewarded by international investors with lower interest rates when it borrows money, may see its deficits narrow this year. But in 2014, the situation is “expected to deteriorate” because of slow growth, the commission said, with the country’s overall debts ballooning above 100 percent of economic output.

 
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