FRANKFURT (MNI) – The European Commission’s spring forecasts see
the Eurozone’s periphery countries in violation of the Stability and
Growth Pact’s debt and deficit rules over the forecast horizon.

However, public finance forecasts are based on the usual “no-policy
-change assumption,” thus painting a more negative picture than should
overall be expected given consolidation efforts underway.

Economic growth is seen in negative in Greece, Ireland and Spain in
2010, while positive growth rates are forecast for Portugal and Italy.
In 2011, only Greece is still seen in recession.

Although there might be some upward pressure from global commodity
prices, inflation levels are expected to remain subdued in all countries
given the huge output gap and weak growth levels.

GDP forecasts for Greece are far better than those used for the
Greek bailout program. The Greek economy is seen contracting 3% in 2009
and 0.5% in 2011 (versus -4.0% and -2.6%).

However, the Commission said that “the balance of risks for the
baseline scenario remains on the downside especially in 2011 as the
estimated confidence gains may be less buoyant or delayed.”

The government deficit is forecast at 9.3% of GDP in 2010, to rise
to 9.9% in 2011.

“Under the no-policy-change assumption and on the back of the
discontinuation of one-off measures in 2010, the headline deficit is
projected to remain at around 10% of GDP in 2011. This, combined with
the economic downturn, would lead to a sizable increase in the debt
ratio over the forecast horizon,” the report said.

The Commission forecasts general government gross debt of 124.9% in
2010 and 133.9% in 2011.

The Portuguese economy is expected to grow a weak 0.5% this year
and a marginally better 0.7% next year as stagnant domestic demand
largely offsets growth impulses from foreign trade.

The government deficit is forecast at 8.5% of GDP this year and
will presumably “narrow somewhat further” to 7.9% in 2011 due to revenue
and expenditure side consolidation measures.

Government debt is seen at 85.8% of GDP in 2010 and — assuming no
policy change — 91.1% in 2011, versus an average of approximately 65%
in the years prior to the crisis.

In Spain, real GDP is forecast to contract by 0.4% in 2010,
followed by growth of 0.8% in 2011 amid weak private consumption and
shrinking investment.

The government deficit is projected at 9.8% of GDP in 2010 due to
the recessionary growth scenario. “This implies a reduction in the
headline public deficit of around 1.4%, due to the consolidation efforts
undertaken by the authorities,” the report said. In 2010, the deficit is
seen dropping further to 8.8%.

“Amidst a contraction in GDP and high public deficits, government
debt is set to increase from 39.7% of GDP at the end of 2008 to 72.5% of
GDP by the end of 2011,” the Commission projected.

In Italy, the economy is expected to benefit from a modest but
sustained recovery in exports and private consumption. GDP growth is
forecast to accelerate to +1.4% in 2011 from +0.8% in 2010.

The spring forecast project a deficit of 5.3% of GDP in 2010 thus
broadly stabilizing at the 2009 level. The 2011 deficit, on a
no-policy-change basis, is projected to fall slightly to 5.0% of GDP.

The gross government debt-to-GDP ratio climbed by almost 10 pps in
2009 to 115.8% and is seen rising further to 118.2% in 2010 and 118.9%
in 2011.

In Ireland, weak domestic consumption is seen keeping GDP at -0.9%
in 2010 before a recovery to +3% in 2011.

In 2010, the deficit is expected to improve to 11.7% of GDP. “The
ongoing adverse underlying budgetary trends are contained by a
significant consolidation package of 2.5% of GDP,” the report said. In
2011, the deficit is projected to increase to just above 12% of GDP on a
no-policy-change basis.

Debt as a ratio of GDP is seen rising to 87.3% in 2011 from 77.3%
in 2010 and 64.0% in 2009.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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