Euro zone to rebound more strongly, borrowing curbs to stay on hold

BRUSSELS: The euro zone economy will rebound from its COVID-19 slump more strongly than previously thought this year and next, the European Commission said, but EU borrowing limits should remain suspended in 2022 so as not to jeopardise that recovery.

The aggregate growth of the 19 countries sharing the euro currency is likely to be 4.3% this year and 4.4% in 2022, the European Union's executive arm said, revising upwards its forecast from February of 3.8% growth in both years.

"The EU and euro area economies are expected to rebound strongly as vaccination rates increase and restrictions are eased. This growth will be driven by private consumption, investment, and a rising demand for EU exports from a strengthening global economy," it said on Wednesday.

The forecast brings the Commission closer to the International Monetary Fund, which last month said it expected 4.4% growth in the euro zone this year.

The Commission said recovery rates would differ across the 19 countries sharing the euro, with Germany likely back at pre-crisis levels as soon as the end of this year, France in the first quarter of 2022 and Italy and Spain only at the end of 2022.

The need to return to pre-crisis levels has been an argument for suspending EU borrowing limits for governments in 2020 and 2021, and the Commission said in March that while its final decision would depend on the May forecasts, the EU should keep the limits suspended in 2022 to help economies rebound.

Economic Commissioner Paolo Gentiloni said the Commission would recommend later in May keeping the suspension in place.

"On the basis of this forecast... EU fiscal rules should stay suspended in 2022," he told a news conference.

Still, government pandemic borrowing has had an impact on the euro zone's finances: aggregate public debt is to rise to 102.4% of GDP this year from 100% in 2020 and 85.8% in 2019. It will edge lower only to 100.8% in 2022, the Commission forecast.

The aggregate euro zone budget deficit is to balloon to 8% of GDP this year before halving to 3.8% in 2022.

"Policy support withdrawal... if premature, could jeopardise the recovery," the Commission said in the forecast.

Inflation, which the ECB has struggled for years to bring closer to its target of below but close to 2%, is to accelerate to 1.7% in 2021 from 0.3% in 2020 and slow down to 1.3% in 2021.

The EU's recovery effort, financed through unprecedented joint borrowing and disbursed in grants and loans through the Recovery and Resilience Facility (RRF), is to boost public investment to 3.5% of GDP in 2022, the highest level in more than a decade, Gentiloni said.

"The total EU expenditure expected to be financed by RRF grants over the forecast horizon amounts to 140 billion euros, or just below 1% of 2019 GDP. The total economic impact generated by the RRF over 2021-2022 is expected to be approximately 1.2% of 2019 EU real GDP," Gentiloni said.

He said the EU also expected positive spillover effects of 0.3% of GDP in 2021 and 0.2% of GDP in 2022 from US stimulus programmes.