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A brighter economic outlook for Europe was blotted by persistent “structural weakness” in Italy and the failure of Italy and France to rein in excessive budget deficits, the European Commission said on Monday.

In a broadly upbeat assessment, the Commission predicted growth in the EU economy of 2.3 per cent this year against 1.6 per cent in 2005 and the 2.1 per cent previously forecast by Brussels.

But Joaquín Almunia, the EU economic and monetary affairs commissioner, warned that “growing at, or slightly above, potential is not enough and some countries are far from exploiting their full potential”.

Europe had to “pursue the path of reforms, correct budgetary imbalances where they exist and make room for expenditure on research and development, innovation and education”.

This was the only way the unemployment rate would come down further, he added.

EU growth would continue to lag significantly behind the rest of the world, according to the Commission’s spring forecast.

After a meeting of central bankers in Basel, Switzerland, Jean-Claude Trichet, European Central Bank president, said the world had seen “an exceptional period” of growth. But he warned that inflation risks had to be tackled at the global, as well as national, level.

Italy’s position as the “sick man” of Europe was confirmed in the report. After the country stagnated in 2005, the Commission expected its economy to grow by 1.3 per cent this year, slowing to before growth decelerated to 1.2 per cent in 2007.

Rome is also certain to come under pressure from Brussels over its government deficit, which is projected to rise from 4.1 per cent of gross domestic product this year to 4.5 per cent in 2007.

Under EU fiscal rules, countries must keep their public deficits below 3 per cent of GDP.

France’s deficit was also expected to rise, from 3 per cent this year to 3.1 per cent in 2007. The forecast prompted Mr Almunia to call on Paris to adopt “new measures in next year’s budget” to bring the deficit back below 3 per cent.

The overall improvement in the region’s economic prospects this year was down to continuing strong investments by the private sector, export growth and the recent pick-up in Germany, the Commission said.

An influenza pandemic could slash EU economic growth by 1.5 percentage points in a year, according to preliminary estimates included in yesterday’s forecasts. However, there would be a recovery the following year.

The estimates, which assumed 150m Europeans would become sick for three weeks, and that 3.75m would die, are the first findings from an ongoing Commission study.

Copyright The Financial Times Limited 2017. All rights reserved.
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