German crisis: European commission cuts 2013 growth forecast for Eurozone

BRUSSELS: The European Commission cut its growth forecast for the Eurozone as the debt crisis ravages southern Europe and gnaws at the economic performance of export-driven Germany.

The 17-nation euro economy will expand 0.1% in 2013, down from a May forecast of 1%, the Brussels-based commission said. It cut the forecast for Germany, Europe’s largest economy, to 0.8% from 1.7%.

Europe’s “economy continues to deal with a difficult post- financial crisis correction,” Marco Buti, head of the commission’s economics department, said in a statement.

“The distress in more vulnerable member states has progressively started to affect the remainder of the union.” The economic falloff may make it harder for European governments to pull Greece back from the brink and deal with a possible aid program for Spain, leaving the debt crisis to fester for a fourth year.

Technically, the euro area will avert a recession, defined as two consecutive quarters of contraction, though the overall economy will still shrink 0.4% in 2012, ending a two-year expansion, the commission said.

Next year’s near-stagnation across Europe masks a north- south divide, in which the economy ekes out positive numbers along an arc from Finland through the Low Countries to France, and contraction grips Greece, Spain, Italy, Cyprus, Portugal and Slovenia.

North-south tensions over the debt crisis will bubble up on November 12, when finance ministers judge whether Greece has made enough budget cuts and economic reforms to deserve the next installment of €240 billion in aid offered since 2010.

Dilemmas facing Greece and its creditors were highlighted by a commission forecast that Greek debt will rise to 188.4% of gross domestic product in 2013, higher than the 168% predicted in May.

Euro governments are aiming to wrestle it down to 120% by 2020. Germany is becoming less resistant to the economic woes of southern Europe just as Chancellor Angela Merkel, the dominant figure in handling of the debt crisis, embarks on a campaign for athird term in elections in late 2013.

Buti pointed to “wide cross-country divergences in economic activity and labor market dynamics” in a common-currency area meant to bring Europe together, not fracture it. The commission predicted “moderate” growth of 1.4% in 2014 that leaves Cyprus alone in negative territory.