European economy teeters on edge of recessionary abyss

  • 2003-05-22
  • Michael Thurston
BRUSSELS

The European Union's economic growth has slowed to zero, new data indicate, fueling speculation of a slide toward recession - fears already confirmed in EU heavyweight Germany.

But the European Commission, while admitting the data were "disappointing," maintained its forecast of a tentative recovery in the second half of the year.

The EU executive reiterated that gross domestic product should grow by between zero and 0.4 percent in the second and third quarters, saying that the the Iraq conflict clouded the latest data.

"There is no reason at this stage, particularly given that the data are influenced by the fog of war, to change our overall scenario for 2003," said commission spokesman Gerassimos Thomas.

According to Eurostat, the EU's statistics agency, GDP growth slowed to zero in both the 12-country euro zone and the 15-member EU in the first three months of 2003, compared with the previous quarter.

"The data are slightly disappointing, slightly surprising," said Thomas, admitting that the commission had hoped that growth would have stayed in the black.

But the figures confirmed that two countries - Germany and the Netherlands - are already technically in recession, having suffered two successive quarters of zero or negative growth.

Germany's GDP contracted by 0.2 percent, the Netherlands' by 0.3 percent and Italy's by 0.1 percent, according to Eurostat estimates.

Eurostat put first-quarter year-on-year growth in the euro zone - which excludes Britain, Denmark and Sweden - at 0.8 percent and at 1 percent in the full EU.

"Most indicators used in the model for this horizon reflect slack growth in terms of both domestic and foreign demand," a commission statement read.

"Low confidence in the United States and only tentative signs for domestic confidence among other factors put a drag on this forecast at this stage."

But the commission insisted that it is still banking on recovery later in the year, including in Germany, Europe's biggest economy.

"The average [forecast growth] for the year for Germany at the moment is valid, as are all our average forecast for 2003," said Thomas, spokesman for EU Monetary Affairs Commissioner Pedro Solbes.

The commission's previous forecasts had been based on an assumption that the Iraq war would end before the summer, which turned out to be the case, he noted.

"All the risks related to the war in our baseline scenario have greatly diminished, and that makes us optimistic that we will have more chances for the indicators to improve during the second quarter, and have the recovery in the second half," Thomas said.

The commission also reiterated that the recent surge in the value of the euro is good news, despite the fact that it puts a drag on exports.

"Overall the effects of the correction of the euro have been positive and a strong euro is in the interests of the euro area and the global economy," said Thomas. "The exchange rate should reflect the economic fundamentals. They didn't in the past, and they do better now."