The euro zone's economy will slow slightly next year as governments cut spending to win back financial market confidence. But private demand should give growth a fresh boost in 2012, the European Commission said on Monday. In its twice-yearly economic forecasts for the 27-nation bloc, the European Union executive said growth in the single currency area would slow to 1.5% in 2011 from 1.7% seen this year, but rebound to 1.8% in 2012. "With private domestic demand as a whole strengthening, the recovery is said to be increasingly self-sustaining over the forecast horizon," Economic and Monetary Affairs Commissioner Olli Rehn told a briefing. The main engine of growth in the euro zone will be the biggest economy, Germany, where growth is likely to slow substantially next year from the 3.7% expansion seen in 2010, but still be a respectable 2.2%.
A weaker global economy will cut demand for eurozone exports, but many eurozone governments will also be slashing spending and raising taxes to return public finances to a sustainable path. The aggregated eurozone budget deficit will shrink next year and in 2012, but debt will continue to rise, with that of Belgium and Ireland becoming larger than their annual output, the Commission said. Concern over the ability of Ireland to service its huge debt, which was boosted by government support to the ailing banking sector, has forced Dublin to seek EU financial help and prompted concern Portugal and even Spain could be next. The budget deficit of the countries using the euro will fall to 4.6% of gross domestic product next year from 6.3% expected this year and further to 3.9% in 2012.
Government debt is set to rise to 86.5% of GDP next year from 84.1% in 2010 and increase to 87.8% in 2012. "A determined continuation of fiscal consolidation and frontloaded policies to enhance growth are essential to set a sound basis for sustainable growth and jobs," Rehn said. "The turbulence in sovereign debt markets underlines the need for robust policy action."
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