Euro zone economic growth should be stronger this year than previously thought and the budget gap lower, the European Commission said, but it warned of risks to recovery from financial market tensions sparked by Greece.
In its twice-yearly economic forecasts for countries of the 27-nation European Union, the bloc's executive said economic growth in the 16 countries using the euro would be 0.9 percent this year, rather than the 0.7 percent it projected in February.
This is because stronger global growth is likely to drive demand for euro zone exports, the Commission said.
But tension on sovereign-bond markets, triggered by concern over the ability of Greece to pay back its debts, could derail the recovery if it spreads to other euro zone countries with large deficits and slow growth — Portugal or Spain, Economic and Monetary Affairs Commissioner Olli Rehn said.
"In order to safeguard the economic recovery, which is still rather modest and somewhat fragile, it's absolutely essential to contain the bushfire in Greece so that it will not become a forest fire and a threat to financial stability for the European Union and its economy as a whole," Rehn told a news conference.
"The euro area is taking care of the Greek case. I'm confident we will succeed to turn things around concerning Greece," Rehn said.
The euro zone and the International Monetary Fund have promised Greece 110 billion euros ($146.5 billion) in loans that will allow the debt-stricken country not to ask markets for credit for around two years while it overhauls public finances.
"I'm confident that the figure of 80 billion euros from euro zone states and 30 billion from the IMF will suffice for the financing needs of Greece for the next two years," Rehn said.
Markets have been speculating that Portugal and Spain might also need emergency loans, but Rehn dismissed such talk.
NO AID FOR SPAIN
"We are not going to propose (an aid mechanism) because there's no need to propose financial assistance," Rehn said. "All euro zone member states are taking measures to consolidate their public finances, Spain and also Portugal."
The euro zone's combined budget shortfall this year is likely to be 6.6 percent of the single currency area's gross domestic product rather than the 6.9 percent forecast by the Commission in November last year, against 6.3 percent in 2009.
The aggregate deficit is to fall in 2011 to 6.1 percent of GDP, still more than twice the EU limit, the Commission said, as growth would accelerate to 1.5 percent next year.
The euro zone debt-to-GDP ratio is seen reaching 84.7 percent this year compared with 78.7 percent in 2009 and increasing further to 88.5 percent in 2011, the Commission said, slightly raising its November 2009 forecasts.
The cut-off date for the data in the latest projections was April 20, which means they do not take into account the latest, higher estimates of Greece's budget deficit and debt in the coming years.
Rehn stressed, however, that the share of the Greek economy in the euro zone was so small that the change in forecasts for Greece did not affect the aggregate total.
The Commission forecast that Greece would have a budget deficit of 9.3 percent in 2010 and 9.9 percent in 2011 unless policies changed. On May 2, Greece announced an agreement with the euro zone in which it projected the deficits at 8.1 percent and 7.6 percent respectively.
The Commission said euro zone inflation — which the European Central Bank wants to keep just below 2 percent over the medium term — would be 1.5 percent this year and 1.7 percent in 2011.
Previously the Commission said euro zone inflation would be only 1.1 percent this year and 1.5 percent in 2011.
"The remaining slack in the economy is likely to keep both wage growth and inflation in check, partly offsetting an assumed increase in commodity prices," the Commission said.
