EU sees deeper euro zone recession in 2013, slower deficit cuts

(Reuters) - The euro zone economy will contract by more than expected this year and budget deficits will decline more slowly, the European Commission said on Friday as it set out forecasts for the next two years.

France, Spain, Italy and the Netherlands - four of the five largest euro zone economies - will be in recession through 2013, the Commission's forecasts showed, with only Germany, the largest euro zone economy, managing to eke out growth.

"In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe. The EU's policy mix is focused on sustainable growth and job creation," EU Economic and Monetary Affairs Commissioner Olli Rehn said.

"Fiscal consolidation is continuing, but its pace is slowing down. In parallel, structural reforms must be intensified to unlock growth in Europe."

The Commission said the euro zone economy would shrink 0.4 percent this year and grow 1.2 percent next year, revising down its projections from last February of a 0.3 percent recession and 1.4 percent growth respectively.

The forecast is roughly in line with the mid-point of the -0.9 to -0.1 percent range forecast for 2013 by the ECB in March, and the 0.0 to 2.0 percent growth range seen for 2014.

The expectations underline a shift of focus in the 17 countries that share the euro from sharp fiscal consolidation in the first years of the sovereign debt crisis to economic growth as earlier radical deficit cuts and European Central Bank action restored some market trust in euro zone finances.

Economic growth will be slower than thought in all the biggest euro zone countries, with France even dipping into a recession of 0.1 percent, rather than growing 0.1 percent as forecast in February, the Commission said.

The only positive change against the February forecasts was Greece, where the economy is now seen contracting 4.2 percent this year, rather than the previous 4.4 percent.

To reduce the negative impact of fiscal consolidation on growth, the overall euro zone budget deficit reduction will be marginally slower this year and next compared with forecast from three months ago. Country differences are bigger.

The aggregate euro zone deficit is to fall to 2.9 percent of gross domestic product this year and to 2.8 percent next year from 3.7 percent last year -- only 0.1 percentage point for each year less than previously envisaged.

But the slower consolidation will be most pronounced in Italy, which is now seen reducing its budget shortfall only to 2.9 percent of GDP this year from 3 percent in 2012, rather than to the 2.1 percent forecast in February.

The main reason for that is a deeper than expected recession this year and a more modest economic rebound in 2014, when Rome is to bring the budget gap down to 2.5 percent, against the earlier forecast 2.1 percent.

France, also in recession, is to have a budget shortfall of 3.9 percent this year and 4.2 percent in 2014 unless policies change, against earlier forecasts of 3.7 percent and 3.9 percent respectively.

Portugal, on a euro zone financial lifeline, will cut its budget deficit this year only to 5.5 percent of GDP from 6.4 percent last year because the recession there will be deeper than expected. The 2013 target in February was 4.9 percent.

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