EU Says Growth to Weaken as Crisis Remains

Europe's economy could weaken next year budget cuts to stem a crisis of mounting debt affect consumer demand and faltering global growth slows exports, said the European Commission.

the gross domestic-product growth in the 16-nation euro may weaken to 1.5 percent in 2011 from 1.7 percent this year, the Brussels-based commission said in a report released today. While Germany may expand 3.7 percent this year, the economies of Ireland, Greece and Spain will continue to decline.

The recovery is "making progress" although the "shock of the global crisis still casts its shadow over the economy," the commission said. "The level of uncertainty for the outlook remains very high."

Ireland yesterday became the second nation euro to receive external assistance as governments try to stop a debt crisis that pushed up borrowing costs and the economic outlook clouded. While growth remains "fragile and uneven," Germany will continue to power the region's recovery, the commission said.

"Investors remain worried," said Juergen Michels, chief economist of the euro-region for Citigroup Inc. in London. "Without Germany, the growth outlook would be rather bleak."

The euro was little changed after the report, trading at $ 1.3176 at 12:09 pm in Frankfurt, up from $ 1.3242 yesterday.

Germany Surge

Recent data indicate a slowdown in the pace of recovery may be modest. The economic sentiment rose to its highest in three years in November, the commission said in a separate report today. German executive sentiment rose to a record and growth in European service and manufacturing industries accelerated.

In Germany, Europe's largest economy, GDP increased 2.2 percent in 2011, today's report showed. In France, the economy may expand 1.6 percent this year and next, while Italy's GDP would increase by 1.1 percent in both years.

In 2011, Greece and Portugal are the only two economies in the euro area show a contraction, the commission said. Ireland's economy may expand 0.9 percent.

"This recovery is uneven, a number of Member States are going through a difficult period of adjustment," said European Economic and Monetary Affairs Commissioner Olli Rehn said in a statement. The commission said that "persistent concerns about fiscal sustainability" is "one of the biggest challenges."

The risks of debt

Ireland 85 million euros (112 million) aid package is intended to quell market turmoil that threatens to spread to countries like Portugal and Spain. The EU also said yesterday to Greece, he received a ransom earlier this year, could have an additional year of four and half years to repay their loans.

"The repetition of the negative feedback loop between increased sovereign risk premia, the ability of banks to lend and the prospects for economic growth can not be excluded", the commission said, adding that "we believe" this scenario is likely.

European Central Bank, Christian Noyer, a member of the council, said today in Tokyo that the economic recovery remains "on track" and the region faces a crisis of confidence.

European stocks rose today, with the Stoxx Europe 600 Index gain as much as 0.8 percent. The premium investors charge to keep Irish 10-year bonds on the German benchmark bonds fell 8 basis points to 638 basis points. It reached a record 656 basis points on November 26, nearly triple expansion four months ago.

The export demand

European companies have been forced to rely on the fastest growing economies to boost sales as budget cuts discouraged home consumption. Porsche, the German sports car manufacturer 911, said Nov. 24 that operating profit increased more than sevenfold in the October quarter.

Export demand helped fuel the fastest growing region in four years in the second quarter, with the economy expanding 1 percent. Growth weakened to 0.4 percent in the third quarter.

"The acceleration of growth seen in particular in the second quarter of this year was exceptional and not likely to last", the commission said. However, "we see a welcome broadening the base of the recovery, domestic demand in the foreground, and recovery more self-sufficient."

While the euro fell against the dollar in the first half of the year, the Greek crisis undermined the currency, is acquired 11 percent since falling to a minimum of four years in June, making exports less competitive and growth weakening global.

The Organization for Economic Cooperation and Development on Nov. 18 lowered its forecast for world growth next year to 4.2 percent from 4.5 percent and predicted a "weakness." The economy of the euro-region can grow by 1.7 percent this year and next, leaving a U.S. expansion, forecasting group based in Paris.

U.S. Federal Reserve decided on 3 November purchase of $ 600 billion in Treasuries to stimulate the world's largest economy. The ECB has bought government bonds and extended emergency liquidity by banks in 2011 to help restore investor confidence in the region of the coin.

The central bank in Frankfurt will publish its latest economic forecasts for this year and next December 2nd.