The European Union economy is recovering from the deepest and longest recession in its history, but growth is still fragile although risks in 2010 are broadly balanced, the European Commission said today.
It said the economies of the euro zone and the EU would expand by 0.7 per cent this year after contractions of 4.0 per cent and 4.1 per cent respectively in 2009.
"With many of the main driving forces being still temporary in the EU and globally, the robustness of the recovery is yet to be tested," it said in a statement.
The Commission said in its interim forecasts for 2010 that while better-than-expected global demand could further spur exports, investment remained very weak, reflecting exceptionally low capacity utilisation.
"A muted outlook for investment typically implies a weak labour market ahead, which in turn is likely to dampen private consumption," the Commission said.
Economic and Monetary Affairs Commissioner Olli Rehn said that apart from weak investment, he was worried about the ballooning budget deficits and debt in most EU countries.
"I am concerned over both investment in growth and jobs and on the sustainability of public finances. In many if not most member states, we are seeing a very high rise in debt ... which means an increasing interest burden," he told a news conference.
The Commission forecast in November that the aggregate budget deficit in the EU in 2010 would rise to 7.5 per cent of gross domestic product from 6.9 per cent in 2009. Debt was seen rising to 79.3 per cent of GDP from 73 per cent.
"We know that the state of public finances is clearly unsustainable," Mr Rehn said. "We have to see a clear and strong consolidation of public finances.
"The only way is to prioritise clearly ... to enhance the quality of public finances so we have room for investment. We have to find new and innovative financial instruments to facilitate investments for these purposes," he said.
The Commission said euro zone inflation, which the European Central Bank wants to keep just below 2 per cent over the medium term, would be 1.1 per cent in 2010.
In the whole EU, inflation should be 1.4 per cent, above the 1.3 per cent forecast in November.
"A sizeable slack in the economy is set to keep inflation in check, offsetting increases in energy and commodity prices. Price stability is expected to be maintained," the Commission said. Risks to the inflation outlook were broadly balanced, as for the growth outlook.
"On the downside, the situation of financial markets remains highly uncertain and subject to serious adverse risks," the Commission said.
Mr Rehn said the still unfinished overhaul of banks' balance sheets could limit lending to the economy.
It cannot be excluded that the state of the banking sector will limit lending to ... households later in the economic recovery. This of course remains a major risk and challenge for the recovery," Mr Rehn said.
But the Commission also said the vigour of the global recovery, particularly in Asian emerging markets, and the imminent turning of the inventory cycle in the EU may have a greater positive impact on domestic demand than anticipated.
Reuters