Europe nearly doubled its growth forecast this week to at least 1.7 per cent for 2010, highlighting recovery in Germany but warning about rising strains in Ireland’s banking system.
The European Union raised its core eurozone growth prediction on data from its seven biggest members, having forecast just 0.9 per cent in the spring, but was at pains to remain prudent.
Encouraged to see “revival... particularly in Germany,” Brussels warned that risks “remain elevated” with a “multi-speed” recovery accentuated by problems with national finances in Ireland and elsewhere.
Amid “major uncertainties” on a global level, where the United States and Japan already lagged well behind, Europe identified “high debt levels and lingering tensions in sovereign-debt markets.”
It said that despite “partial recovery” since a trillion-dollar emergency facility was agreed in May, the reality remains “tenuous, and adverse effects on bank credit provision to the economy cannot be ruled out”.
Ireland has become the latest country to suffer, paying more to keep pace with an ever-deeper pit of bail-out funding required for its banking sector, with the latest example being the Anglo Irish Bank.
Analysts fear tougher times lie ahead, with tightened bank funding rules agreed on Sunday.
EU economic affairs chief Olli Rehn urged Dublin to implement a “rigorous approach”, saying that while tens of billions of euros thrown at its banks represented a “convincing” effort, it would still prove a “costly” repair job.
Monday’s Financial Times published an opinion piece in which the Irish banking sector was described as “insolvent”, raising “justified doubts about the country’s long-term” future.
The cost of its financial sector bail-out could exceed 30 per cent of Irish output, it added.
Brussels said that sovereign-bond spreads in Europe “are still significantly above the levels seen at the beginning of the year”, warning of “historic lows” for benchmark yields, with the latest research providing “evidence of renewed tightening of bank credit standards”.
Nevertheless, it did suggest better job prospects lay ahead, saying the labour market “has started to stabilise”.
Spain’s struggle to escape recession was also highlighted, with the forecasts pointing to another year of contraction – a decline of 0.3 per cent following last year’s 3.7 per cent collapse.
Even among the most powerful EU states, France’s recovery remains “gradual”, Italy and the Netherlands show only “moderate” momentum and non-euro Britain can also expect to “slow down”.
Ex-Communist Poland, with real GDP growth for 2010 expected to hit 3.4 per cent, is again set to be the bloc’s leading performer.
European Central Bank chief Jean-Claude Trichet called last week for a “quantum leap” in budget checks on eurozone nations, including the possible suspension of national voting rights.
Leaders are due to debate such issues on Thursday at a Brussels summit.
Pulled up by Germany’s best quarterly performance since reunification in 1990, with growth of 2.2 per cent, Europe’s economy outpaced the United States and Japan between April and June, posting a one per cent expansion compared to growth of 0.4 per cent in the United States and 0.1 per cent in Japan.
However, “stronger signals that the expansion may lose momentum have emerged in Japan, the United States and Brazil”, the Organisation for Economic Cooperation and Development said in Paris on Monday.
In Germany and Russia, the expansion “may soon peak”, while in Canada, France, Italy, Britain, China and India “there are stronger signals of a slower pace of economic growth in the coming months” than previously thought.
On Monday, International Monetary Fund head Dominique Strauss-Kahn maintained his confidence that developed economies would not fall back into recession. “We don’t believe that the double-dip will take place,” he said.