UPDATE 1-Euro zone 2011 growth to slow amid spending cuts

* Weaker global economy, austerity measures to slow growth

* Deficits seen declining, but debt keeps growing

* German growth seen slowing substantially next year

(Combines stories, adds Rehn comments)

By Jan Strupczewski

BRUSSELS, Nov 29 (BestGrowthStock) – The euro zone’s economy will
slow slightly next year as governments cut spending to win back
financial market confidence, but private demand will give growth
a fresh boost in 2012, the European Commission said on Monday.

In its twice-yearly economic forecasts for the 27-nation
bloc, the European Union executive said growth in the single
currency area would slow to 1.5 percent in 2011 from 1.7 percent
seen this year, but rebound to 1.8 percent in 2012.

“With private domestic demand as a whole strengthening, the
recovery is said to be increasingly self-sustaining over the
forecast horizon,” Economic and Monetary Affairs Commissioner
Olli Rehn told a briefing.

The main engine of growth in the euro zone will be the
biggest economy Germany, where growth is likely to slow
substantially next year from the 3.7 percent expansion seen in
2010, but still be a respectable 2.2 percent.

A weaker global economy will cut demand for euro zone
exports, but many euro zone governments will also be slashing
spending and raising taxes to return public finances to a
sustainable path.

The aggregated euro zone budget deficit will shrink next
year and in 2012, but debt will continue to rise, with that of
Belgium and Ireland becoming larger than their annual output,
the Commission said.

Concern over the ability of Ireland to service its huge
debt, which was boosted by government support to the ailing
banking sector, has forced Dublin to seek EU financial help and
prompted concern Portugal and even Spain could be next.

The budget deficit of the countries using the euro will fall
to 4.6 percent of gross domestic product next year from 6.3
percent expected this year and further to 3.9 percent in 2012.

Government debt is set to rise to 86.5 percent of GDP next
year from 84.1 percent in 2010 and increase to 87.8 percent in

“A determined continuation of fiscal consolidation and
frontloaded policies to enhance growth, are essential to set a
sound basis for sustainable growth and jobs,” Rehn said.

“The turbulence in sovereign debt markets underlines the
need for robust policy action.”


The market spotlight has now turned to Portugal, which has a
large debt, but very slow growth and an uncompetitive economy.

Weighed down by heavy cuts in budget spending and higher
taxes, Portugal will fall back into recession, contracting 1
percent in 2011, and return only to weak growth of 0.8 percent
in 2012, the Commission forecast.

Lisbon plans to cut its budget deficit to 4.9 percent in
2011 from 7.3 percent this year, but its debt will rise to 88.8
percent of GDP in 2011 from 82.8 percent seen this year.

“In case the fiscal target would be missed because of
somewhat lower growth materialising, then the government assumes
that is essential still to meet the fiscal target if necessary
by taking additional measures,” Rehn said.

“And moreover, it is clear that it is essential that
Portugal will develop and implement equally ambitious structural
reforms to reach its growth potential,” he added.

Ireland, which on Sunday agreed on an 85 billion euro rescue
package from the EU and the International Monetary Fund, will
see its economy grow 0.9 percent next year after a 0.2 percent
contraction this year, but growth should accelerate to 1.9
percent in 2012, the Commission said.

Dublin will have the biggest budget gap in the EU of 32.3
percent this year, because of huge costs of supporting its
ailing banking sector, but will reduce that shortfall to 10.3
percent next year and cut it further to 9.1 percent in 2012.

“The Irish economy is flexible and while there are serious
challenges concerning public finances and especially the banking
sector… it has the capacity of rebounding rapidly from this
recession. Export growth is already a fact,” Rehn said.

Spain, also in the market spotlight because of its low
growth and a potentially costly repair of its banking system,
will contract 0.2 percent in 2010 but grow again 0.7 percent in
2011 and 1.7 percent in 2012, the Commission said.

Its deficit is to fall to 6.4 percent in 2011 from 9.3
percent in 2010 and to 5.5 percent in 2012 as Madrid’s austerity
measures kick in. Spain wants to cut its budget deficit to 6
percent next year, a target Rehn called challenging.

“The Spanish fiscal strategy…is on track. If growth next
year is lower than expected, it is necessary to take further
measures to make sure that the fiscal target is met,” he said.

While deficits will decline, debt will still rise.

The highest debt of all EU countries will be in Greece,
where debt will balloon to 105.2 percent of GDP next year from
140.2 percent in 2010 and rise even further to 156 percent in

Belgium will see its debt rise from 98.6 percent of GDP this
year to 100.5 percent in 2011 and to 102.1 percent in 2012.

Ireland’s debt is also likely to grow to 107 percent of GDP
next year from 97.4 percent expected in 2010, and to jump to
114.3 percent in 2012.

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(Reporting by Jan Strupczewski, editing by Rex Merrifield
and Patrick Graham)

UPDATE 1-Euro zone 2011 growth to slow amid spending cuts