EUROZONE CRISIS – Economy to shrink in 2013

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THE European Commission (EC) yesterday admitted that the eurozone economy would contract in 2013, saying it will shrink by 0.3%.

The EC warned that Spain, France and Portugal have failed to cut overspending to agreed targets.

Spain’s government deficit was 10.2% of the country’s economic output in 2012, well above the agreed 6.3% target, and will stay far above target into 2014.

Previously, the EC had expected the 17 economies in the eurozone would collectively enjoy 0.1% positive growth this year. In 2012 the economy is estimated to have shrunk 0.6%

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Delivering its winter forecast, EC Vice-President Olli Rehn said that unemployment across the single currency area is expected to continue rising to 12.2% this year as the recession deepens. Last year’s jobless rate was 11.4%.

The EC figure follows the International Monetary Fund warning in January that the eurozone would experience a ‘mild recession’ in 2013, having previously predicted growth.

The World Bank also revised down its global growth forecasts earlier in January, as the world economy slowed in the last three months of 2012.

The austerity measures being implemented by eurozone governments are widely blamed by economists as a major contributor towards Europe’s economic woes, although there is disagreement among economists as to whether governments should therefore go easy on the spending cuts.

Spain, which has one of the biggest budget deficits, faces one of the nastiest recessions.

Of its 10.2% deficit in 2012, 3.2 percentage points were due to the cost of cleaning up its banking system, which has been decimated by loans made to property developers and speculators during the last decade’s housing bubble that have since proved unrepayable.

The Commission was concerned about a ‘surprise’ fall in Portugal’s economy, which shrank 3.2% in 2012 and is forecast to contract by another 1.9% in 2013.

The UK government was warned that it is also not on target with its deficit reduction – with government overspending expected to increase to 7.4% of GDP this year, the worst in the EU, from 6.3% in 2012 – and it will need to take additional austerity measures.

However, the UK government is being urged by UK bosses to inflate, not deflate, and that inflation to further slash wages would be better than austerity.