Italy, France to lag Germany in eurozone growth

February 26, 2014 - 12:00:00 am
BRUSSELS: Germany is set to accelerate away from France and Italy in 2014 as the fragmented eurozone economy gradually recovers from its worst crisis, the European Commission said yesterday.

In a departure from the gloom of recent years, Brussels slightly increased its growth prediction for the bloc’s ¤9 trillion economy to 1.2 percent in 2014 from an earlier 1.1 percent. It was powered chiefly by an expected 1.8 percent jump in the eurozone’s biggest economy Germany.

The statistics also made clear the scale of the challenge facing Italy and its new prime minister, Matteo Renzi, in turning around the bloc’s third-largest economy. The Commission predicts meagre growth of 0.6 percent this year.

No.2 economy France is expected to grow one percent in 2014. For the bloc as a whole in 2015, the commission raised its forecast slightly to 1.8 percent. 

“Recovery is gaining ground,” said Olli Rehn, the EU commissioner in charge of economic policy. “The worst of the crisis may now be behind us,” he said, cautioning, however, that the recovery was “still modest”.

The improving growth outlook will relieve the European Central Bank, but policymakers there will also have to grapple with forecasts showing persistently low inflation and no significant drop in the region’s record unemployment rate.  

Meanwhile, the economic output figures outline how Europe still lags the United States. The US economy is expected to grow by around three percent in 2014, buoyed by a massive money printing programme that the ECB has been unable to emulate.

The figures draw a clear dividing line in the eurozone between southern countries such as Greece, struggling economically and arguing for more freedom to spend, and Germany, buoyed by strong exports and determined to enforce thrift.

Paul De Grauwe, an economist with the London School of Economics, blamed Germany for hampering the ECB and said the time had come for the central bank to act following its creation of a special emergency programme to buy state bonds through outright monetary transactions, known as OMT.

“They need to take some risks,” he said. “The ECB has been bold once when they announced OMT but since that it has done nothing.

“The Germans are afraid of their own shadow. The US has been willing to go further in stimulating the economy. As a result, growth has accelerated,” he said.

ECB President Mario Draghi  has less freedom, however. Under its statutes, the bank is banned from buying bonds directly from governments, although it can find ways to buy them from banks, for example, on the open market or accept them as security in return for finance.

Some in the market expect the ECB’s next move could be to offer a further round of cheap, long-term loans to banks.