Brussels assumes “no policy change” on British membership in its latest economic forecasts for Europe, cutting growth forecasts
In its latest three-year economic healthcheck on Europe, which encompasses a British referendum, the Commission assumed a “no policy” change scenario, where the UK will vote to stay in the union.
Britain is set to outstrip growth in the euro’s three largest economies – Germany, France and Italy – hitting 2.5pc this year, followed by 2.4pc in 2016, according to the EC’s Autumn economic forecast.
But the report, which stresses a number of “downside” threats to growth, does not take in to account the risks of a “Brexit” on the domestic or European economy.
The bank also believes there is a more than one-in-three chance the British electorate will vote to leave when a plebiscite is held before the end of 2017.
But Pierre Moscovici, the EU’s economics chief, said the Commission would not speculate on “what if” scenarios.
“We base our figures on no policy change. But everybody knows [Brexit] would be a more than important policy change,” said the former French finance minister.
“We all expect and want the UK to stay in the European Union, which is positive for the EU and the UK itself.”
Ireland, currently the euro’s fastest growing economy, has its trade and investment fortunes closely inter-twined with Britain. The Commission tacitly acknowledged that Brexit would affect the Irish economy, but did not flesh out any of the fall-out from a “Leave” vote.
A separate report from the Dublin-based Economic and Social Research Institute estimates ireland’s bilateral trade would fall by 20pc and the economy would face higher energy prices if Britain votes to leave union.
Growth forecasts for the eurozone were cut as the bloc is expected to expand at a subdued but steady rate over the coming years.
GDP growth in the 19-country bloc will fall to 1.8pc next year, against an earlier forecast of 1.9pc, according to the European Commission’s Autumn forecast.
The EU as a whole will grow by 1.9pc, 2pc, and 2.1pc over the next three years, pushed higher by countries outside of EMU.
“The difference between economic growth in the euro area and the EU is mainly the result of strong growth performance in the UK, Poland and Sweden, which are expected to grow at rates above 2pc in each of the forecast years,” said the report.
Greece will be the only eurozone country to fall into recession this year, but the Commission’s numbers are an improvement on earlier predictions of a deeper downturn. Greek GDP will contract 1.4pc this year – 1pc higher than projected in August. This will be followed by a 1.3pc contraction in 2016.
However, Greece’s chronic unemployment will rise by 0.1pc to 25.8 in 2016. In the 2014 Autumn forecast, Greece was projected to be the fastest growing economy in the euro, before its bail-out programme was thrown into jeopardy at the start of the year.
Across the bloc as a whole, the Commission stressed weak demand from emerging markets, anaemic global trade and a Chinese slowdown would negate the positive affects of a weak currency and low oil prices.
Mr Moscovici said Chinese growth will be “harder than we forecast”, with Brussels’ economists now expecting growth to slow to 6.8pc in 2015 – in line with IMF forecasts – and to 6.2pc in 2017.
Inflation in the eurozone is expected to remain close to 0pc for the rest of the year, allowing the European Central Bank to keep monetary policy accommodative, said the report. Fiscal policy on the other hand, would have a “neutral” impact on growth after three years of belt-tightening.
Spain, Greece and France are all set to fall foul of the eurozone’s stringent deficit rules next year.
The Commission’s figures will prove particularly problematic for Spain, showing Madrid’s deficit will be worse than estimates released just last month.
Brussels has already sent back the country’s draft 2016 budget six weeks ahead of a crucial election where the incumbent prime minister is hoping for re-election based on transforming Spain’s economic fortunes.
According to the Autumn forecast, Spain’s deficit will now only fall to 4.7pc in 2015, and 3.6pc next year, breaching the 3pc deficit ceiling. This compares to an initial undershoot of 4.5pc and 3.5pc, the Commission estimated in October.
Brussels has been criticised for failing to apply the full force of its fiscal rules on larger member states and acting in a “politicised” manner. This refrain that is set to be revived when the EU provides its official verdict on member state budgets by the end of the year.
France is set to be in the firing line once again, having been afforded a two-year extension to hit its deficit target earlier this year. A “timid recovery” in Europe’s second largest economy will see it become the only eurozone economy falling foul of the Stability and Growth pact rules with a 3.3pc deficit in 2017.
In a bid to beef up compliance, the Commission has created a new European Fiscal Board to provide an independent analysis of government budgets.
Jeroen Dijsselbloem, head of Europe’s finance ministers, has also proposed creating a “big European sister of the national fiscal councils”, to monitor national budgets.
German factory slump
In more evidence the eurozone remains mired in a demand slump, Germany’s factories suffered their third consecutive month of falling orders in September.
It was the first time Europe’s largest economy and traditional engine of growth had seen new orders decline over a quarter since 2011.
Falling domestic and European demand for German wares “indicates that the eurozone stagnation is far from being over” said Carsten Brzeski, economist at ING.
“These German data are still pre-Volkswagen. Any possible impact from the Volkswagen crisis on the German economy will at the earliest be felt in October.”