Euro zone to flatline in 2013, pick up in 2014 - EU executive

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By Jan Strupczewski | November 8, 2012 12:35 AM EST

The euro zone economy will barely grow next year but pick up in 2014, the European Commission said on Wednesday, forecasting slower growth than governments in all the bloc's biggest economies expect.

The European Union's executive arm said the economy of the 17 countries sharing the euro would grow only 0.1 percent in 2013 after a bigger than previously forecast 0.4 percent contraction this year as a result of the sovereign debt crisis.

Growth is predicted to rebound to 1.4 percent in 2014 as structural reforms now under way start bearing fruit, the Commission said.

"The aggravation of the sovereign debt crisis in the first half of the year, with rising market concerns about the long-term viability of the euro area and negative feedbacks between banks' funding pressures and economic activity ... are the main reasons for the disappointing growth performance in 2012," the Commission said.

The weak staring point will keep growth low to non-existent in 2013, it said, and any expansion would be mainly thanks to net exports, which will benefit from a recovery in global demand.

Domestic demand will make no contribution to growth well into 2013 as households curb spending amid record high unemployment and higher taxes imposed as part of fiscal consolidation efforts by governments.

Government spending cuts made to regain market confidence, will bring the overall budget deficit for the area down to 3.3 percent of gross domestic product this year from 4.1 percent in 2011. The shortfall will fall further to 2.6 percent next year and 2.5 percent in 2014, the Commission said.

"Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time," EU Economic and Monetary Affairs Commissioner Olli Rehn said.

"Europe must continue to combine sound fiscal policies with structural reforms to create the conditions for sustainable growth to bring unemployment down from the current unacceptably high levels," he said.

The Commission made less optimistic growth forecasts for all the biggest euro zone countries than their governments have.

Germany, the biggest in Europe, would grow 0.8 percent in 2012 as Berlin expects, but only 0.8 percent in 2013, rather than 1 percent forecast by the government, the Commission said.

The bloc's number two economy France would grow only 0.2 percent this year, 0.4 percent in 2013 and 1.2 percent in 2014, rather than the 0.3, 0.8 and 2.0 percent respectively forecast by Paris.

The French budget deficit would be 4.5 percent of GDP this year, 3.5 percent in 2013 and 2014, unless policies change, rather than 3.7 percent for this year and 2.5 percent and 2.0 percent forecast by Paris for 2013 and 2014.

ITALY IN BETTER SHAPE THAN SPAIN

Italy will contract 0.5 percent next year after a 2.3 percent recession in 2012, more than twice the 0.2 percent fall which Rome sees next year.

Italy's budget deficit will ease only to 2.1 percent next year, without a policy shift, rather than to the 1.8 percent expected by Italy.

Spain, under market pressure to seek help from the euro zone rescue fund, will suffer a recession almost three times deeper at 1.4 percent in 2013 than the 0.5 percent contraction predicted by Madrid, unless it takes additional steps.

Its budget deficit will miss the agreed targets easing to 6.0 percent in 2013 from 8.0 percent seen this year and rising to 6.4 percent in 2014, the EU executive said.

Madrid forecast in September in its draft budget, that the deficit would be 6.3 percent this year and 4.5 percent in 2013. The Commission also forecasts much higher debt-to GDP ratios for Spain for this year and next than Madrid.

Bucking the trend, the Commission said that Greece, which is struggling to clinch a deal with international lenders to unfreeze emergency loans without which it will default, will enjoy stronger economic growth than Athens itself expects.

The EU executive believes the Greek economy would contract 4.2 percent next year after shrinking 6 percent in 2012 and grow 0.6 percent in 2014.

The Greek government is assuming a contraction this year of 6.5 percent, 4.5 percent next year and that growth in 2014 would only be 0.2 percent.

The Commission and Athens also differ on the budget deficit outlook with the Commission forecasting a gap of 5.5 percent of GDP in 2013 and 4.6 percent in 2014, while Greece hopes for 3.8 percent in two years.

(Reporting By Jan Strupczewski, editing by Mike Peacock)

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