The European Commission raised its euro-area growth forecast as the impact of a weaker euro and unprecedented monetary stimulus help the economy overcome pressure on confidence from the continuing crisis in Greece.
Gross domestic product in the 19-nation currency bloc is forecast to increase 1.5 percent this year, up from 1.3 percent in February, according to the commission, the European Union (EU) executive in Brussels. It slashed its growth projections for Greece at a time when the cash-strapped country is struggling to persuade its euro-area partners to help pay its bills.
“The legacy of the crisis will continue to be felt for years to come,” Marco Buti, the head of the commission’s economics department, said in the report. “Will the economy be able to generate a self-sustained and balanced expansion once these temporary tailwinds fade? The answer is not self-evident.”
The European Central Bank’s (ECB’s) quantitative-easing program “is having a significant impact” on financial markets and the economy, the commission said. “Fiscal policy is also accommodating growth.” Lower oil prices, the euro’s depreciation, and steady global growth also are supporting the European economy.
Tuesday’s report shows that while the euro area is slowly recovering, France, the bloc’s second-largest economy, will not expand as quickly in 2016 as the EU forecast just three months ago. Italy, the third-largest euro-zone economy, will see its debt pile get larger this year as it records growth of 0.6 percent, according to the forecasts.
The cut in the growth forecast for Greece—where Europe’s debt bomb exploded more than five years ago—may make it harder for Prime Minister Alexis Tsipras’s government to convince the EU and the International Monetary Fund (IMF) that it should row back austerity while it struggles to record a primary budget surplus.
“There is a choice for the Greek government to make—time is running out,” European Commission Vice President Valdis Dombrovskis said in a statement. “All fundamentals for a return to growth and stability are still very much there.”
Greece will grow 0.5 percent in 2015, the commission projected. That compares with a 2.5 percent prediction in the EU’s most recent forecasts published in February.
“Positive momentum” in the Greek economy has “been hurt by uncertainty since the announcement of snap elections in December,” the commission said. “The current lack of clarity on the policy stance of the government vis-a-vis the country’s policy commitments in the context of the EU/IMF support arrangements worsens uncertainty further.”
While the more pessimistic outlook for Greece means it’s as important as ever that Greek authorities reach an agreement with their creditors, the commission does not see the country leaving the euro-area, European Economic Commissioner Pierre Moscovici said.
“Grexit is not an option that the commission is envisaging,” he told reporters. “Once you have one country leave, the next question is: ‘Who’s next?’”
The Brussels-based commission forecast euro-area inflation to start creeping up again and avoid the deflation it predicted in February. Yet it will remain below the ECB’s goal of just under 2 percent throughout this year and next. Inflation will stand at 0.1 percent in 2015, before quickening to 1.5 percent in 2016, the commission said.
Euro-area consumer prices ended a four-month streak of declines in April, underpinning ECB President Mario Draghi’s claim that his program of quantitative easing is already having an impact.
“The expanded asset-purchase program adopted by the ECB has lowered interest rates while stabilizing inflation expectations, thus reducing the real interest rate,” Buti said.
A significant weakening in the euro and a decrease in the price of oil has also helped the euro-area recovery, the commission said.
The euro has fallen more than 8 percent against the dollar since the start of year. The cost of oil decreased by more than half since a peak in June, the commission said.
The EU said that tension with Russia over its involvement in violence in Ukraine, which has led the bloc to impose sanctions, could have a negative effect on growth.
Unemployment in the euro bloc looks set to “remain intolerably high for a long time,” according to Buti. It will gradually decrease from a projected 11 percent this year to 10.5 percent in 2016, the commission said.
The commission downgraded its 2016 growth forecast for France. France will grow by 1.1 percent this year, it said, a slight improvement on the 1 percent forecast in February.
“A lower pace of structural reforms could jeopardize the nascent improvement in household and business confidence and weaken the fragile recovery,” according to the report.
Tuesday’s forecast signals that France’s deficit will narrow from 4 percent of GDP in 2014 to 3.8 percent this year and 3.5 percent in 2016. This represents a more optimistic forecast than it made in February. Earlier this year, the commission allowed France two extra years to meet the EU’s deficit target of 3 percent of GDP.
Italy’s economy, burdened with the second-largest amount of debt in the region after Greece, will grow 0.6 percent this year. The commission predicts growth of 1.4 percent in 2016, compared with its February forecast of 0.6 percent and 1.3 percent, respectively.
–With assistance from Kristian Siedenburg in Vienna.