World Economy

Europe economy ‘not improving fast enough’: EU

The prospects for economic growth in the euro zone is looking increasingly bleak after the European Union's executive arm slashed its forecast, citing the need for "credible" fiscal policies, "ambitious" structural reforms and "much-needed" investment.

"The economic and employment situation is not improving fast enough," said European Commission Vice-President Jyrki Katainen in the body's autumn economic report on Tuesday.

The European Commission in Brussels, Belgium
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The euro zone is now seen growing by 0.8 percent this year, down from the 1.2 percent forecast in May. In 2015, the area is seen expanding by 1.1 percent, down from 1.7 percent.

"The EU's recovery appears weak in comparison to other advanced economies, and with respect to historical examples of post-financial crisis recoveries, even though these too were typically slow and fragile," said the Commission.

Notable laggards in the 18-country group include Italy, which is seen contracting by 0.4 percent this year, and France, expected to post tepid growth of 0.3 percent.

"Italy and France, which together account for some 40 percent of the bloc's output, will remain mired in stagnation for the foreseeable future. This sounds the death knell for any kind of meaningful fiscal and structural reform in both countries," said Nicholas Spiro of Spiro Sovereign Strategy in a note after the Commission's forecasts were published.

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Inflation forecasts were also slashed. Price levels in the euro zone are now seen rising by 0.5 percent this year and 0.8 percent in 2015, versus the 0.8 percent and 1.2 percent figures forecast in May.

The Commission attributed the downward trend in inflation to lower commodity prices and "substantial economic slack".

Disinflation—declining inflation—in the euro zone poses a particular problem for policymakers. The European Central Bank has enacted a series of stimulus measures, including purchases of asset-backed securities, to try and push inflation back towards its target level of around 2 percent.

The central bank is coming under increasing pressure to unleash quantitative easing - the buying up of government debt -- as a way to get the euro zone economy going again.

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"We still don't think the ECB will follow the the Bank of Japan in surprising investors this Thursday," said BBH's Marc Chandler in a note published after the Commission's updated forecasts.

"However, ECB President Mario Draghi will likely confirm that there are other assets, such as corporate bonds, that the ECB could purchase if needed. Draghi has argued that the impact of the ECB's unorthodox monetary policy is constrained by the lack of sufficient structural reforms on the government level."