By Richard Johnstone | 21 June 2013
Slowing down government spending cuts across the eurozone could raise economic output in the currency area by nearly 1%, according to Ernst & Young.
The consultancy’s Eurozone forecast warned the recovery across the region would be ‘slow and painful’, with the current recession expected to last for the rest of 2013.
Overall, it expected the combined economies to contract by 0.6% this year, with a ‘very slow recovery’ to begin in 2014, when growth would reach 0.9%.
Unemployment, currently 12.2% across the area, is forecast to peak at 12.7% in the first three months of 2014, or around 20.5 million people, according to the forecast.
However, if government austerity programmes planned across the eurozone were halved, combined gross domestic product would rise by 0.2% in 2013 and a further 0.7% in 2014, with Greece and Spain benefiting most.
The report point out that the European Commission’s decision last month to give six member states extra time to reduce their deficits had removed the need for some deeper spending cuts.
Postponement of some fiscal targets, in countries including France, Spain and Italy, meant it was possible to envisage a scenario where the eurozone moved towards abandoning austerity either wholly or partially, the report added. Were this to happen, growth would be higher than currently forecast.
Marie Diron, senior economic adviser to the forecast, said structural reforms being implemented, particularly by countries across the periphery, would take some time to have an impact on GDP.
‘On the positive side', she said, the relaxation of fiscal austerity meant that measures that could have potentially harmed growth had been avoided. 'But fiscal policy will remain restrictive,’ she added.
Mark Otty, Ernst & Young’s area managing partner for Europe, Middle East, India and Africa, said the ‘much delayed’ recovery could be hampered further if unemployment continued to rise.
However, the eurozone crisis had acted as a catalyst for structural reforms that otherwise might not have taken place, he said.
‘It may be cold comfort for European citizens half way through a lost decade but policy-makers are increasingly aware of the need to accompany fiscal consolidation with long-needed structural reforms which are necessary if the eurozone is to effectively compete on the world stage.’
