The German and French central banks issued downbeat growth forecasts Friday, as the EU Commission came under pressure to bring Paris in line over excessive deficits. The Bundesbank said the powerhouse German economy would expand by 1.7 percent this year, slowing to 1.4 percent in 2017. This was a downgrade of previous forecasts of 1.8 percent and 1.7 percent respectively.
Nevertheless, the bank's head, Jens Weidmann, said the German economy stood on a "relatively firm" footing. The bank said it expected the economy to grow by 1.8 percent in 2018. Exports, long the bedrock of the German economy, are only providing a "limited" push but "should pick up" in coming years, Weidmann predicted.
The latest forecast brings the central bank into line with the German government's 2016 forecast, which is slightly more optimistic than the International Monetary Fund with a 1.5 percent growth estimate and German economics institutes which expect 1.6 percent. Inflation is expected to remain subdued this year, the Bundesbank said, with consumer prices rising by just 0.2 percent, accelerating to 1.5 percent next year and 1.7 percent in 2018.
The Bank of France also reiterated its earlier 1.4-percent French growth forecast for this year, but cut its outlook for 2017 to 1.5 percent from 1.6 percent earlier. Growth of 1.6 percent would now only be achieved in 2018, it said. The central bank said the international environment had become "less favourable" for French growth, and also cited expectations of higher oil prices as a negative factor for expansion.
Limited growth was expected to lead to an equally limited increase in jobs, with the French unemployment rate, a key issue for President Francois Hollande, easing to 10.1 percent this year from 10.3 percent in 2015, and falling below 10 percent only in 2018, the Bank of France predicted. The bank also called on the government to control its deficits with the aim of cutting debt, which stands at 96 percent of GDP, vastly higher than the eurozone's 60-percent target.
Hollande's government has promised to reduce the public sector deficit to 3.3 percent of GDP this year before bringing it below the eurozone's three-percent limit in 2017, to 2.7 percent. Meanwhile, Eurogroup chief Jeroen Dijsselbloem criticised the EU Commission for being too lenient on France concerning fiscal rules, in remarks published Friday. "If the Commission is only strict with smaller countries and unable to be strict on larger countries, that would be devastating for the confidence we have in our cooperation," he said in an interview with several European newspapers, including Britain's The Guardian.
He was referring to reported remarks by Commission head Jean-Claude Juncker that France won a two-year reprieve on deficit targets "because it is France", while smaller countries have been under much more pressure. "You have to be a little careful if it is in your advantage that the commission turns a blind eye ... In the end, if we turn a blind eye everywhere, we make a blind monetary union," Dijsselbloem said.
Asked about the comments Friday, EU Commission spokesman Margaritis Schinas acknowledged that the EU exercises "political discretion" in its dealings with governments over deficits, but said the size of a country did not matter. "The president (Juncker) was very clear on many occasions that in applying the rules, the Commission makes no difference whatsoever between small and big member states, something that is quite obvious for a former prime minister of Luxembourg," he told a news briefing.
In another sign that the Dijsselbloem attack found its mark, Economy Commissioner Pierre Moscovici insisted that France would not be allowed any deficit slips this time. "France has made commitments. It must keep them," he told French LCP television. "We will be vigilant, we will be demanding and there is no alternative to being below three percent in 2017," he said, referring to the eurozone target. He said a additional spending plans in the run-up to next year's French presidential election would have to be offset elsewhere.