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E.U. slashes growth forecasts

Young Scientists Protest In Madrid Against Cutback In R&D In SciencesYoung Scientists Protest In Madrid Against Cutback In R&D In Sciences
How will Europe get them back to work?Photograph by Pablo Blazquez Dominguez — Getty Images

The European Union Tuesday slashed its forecasts for growth for this year and next, acknowledging that the bloc’s two biggest economies, Germany and France, had both slowed down dramatically this year.

The Brussels-based European Commission said it now expects gross domestic product in the Eurozone, the heart of its economy, to grow by only 0.8% this year, with a slow improvement to 1.1% next year and 1.7% in 2016.

In its last forecasts six months ago, the Commission had expected the Eurozone to grow by 1.2% this year and by 1.7% in 2015. The revision is due largely to a sharp lowering of expectations for German growth to 1.1% this year from 1.8%, and for France (cut to 0.3% from 1.0%).

That in turn is due largely to German angst over the crisis in Ukraine and to France’s painfully slow efforts to tackle its sclerotic labor market and gaping budget deficit.

The new forecasts underline how much work the new European Commission and Parliament have to do to get the economy back on track at a time when key players like the German and French governments appear to be pulling in different directions.

“The economic and employment situation is not improving fast enough,” Jyrky Katainen, one of a handful of vice-presidents in the new Commission, said in a statement.

Possibly the grimmest aspect of the forecasts is that the Commission still expects the Eurozone’s jobless rate to be at 10.8% at the end of 2016, only a scant improvement on the 11.5% rate posted in October. In Spain and Greece, the Commission expects more than one in five people to be unemployed by the end of 2016 despite posting some of the strongest growth figures in the Eurozone.

The E.U. is hoping that growth will pick up now that the European Central Bank has given its seal of approval to the 130 largest banks in the Eurozone. The ECB takes over officially as supervisor of those banks, which account for over 80% of assets in the banking system, as of Tuesday.

The Commission reckoned that the ECB’s review “has reduced uncertainties about the soundness of the banking sector and improving financing conditions should help with the pick-up in economic activity.”

But it acknowledged that “downside risks to the growth outlook still dominate on the back of geopolitical tensions, fragility in financial markets and the risk of incomplete implementation of structural reforms.”

And its forecasts underlined how close the Eurozone is coming to deflation, with consumer prices expected to rise only 0.5% this year, 0.8% in 2015 and 1.5% in 2016.

The ECB has announced a plan to inject up to a trillion euros more into the financial system to help support a nascent turnaround in lending, but rifts within its governing council are threatening to weaken its impact.