EU hikes growth forecasts, warns on jobs

BRUSSELS (AFP) - – The European Commission said on Tuesday it now expected the eurozone economy to expand rather than contract in 2010 but warned that rising unemployment and public deficits would remain problems for several years.

The commission said a gradual recovery taking hold through 2011 would increase political pressure on European Union member states to reduce deficits that have soared as governments borrow massively to fund stimulus measures.

At the same time, however, rising unemployment in the core 16 nations that use the euro currency may mean governments will be hesitant to cut back spending for risk of jeopardising jobs and the broader recovery.

In a sign that the worst of the deepest and longest recession in European Union history may be over, the commission revised its eurozone growth estimate up to 0.7 percent for 2010 and 1.5 percent in 2011.

Previously the commission had expected a 0.1 percent drop next year.

It also said that unemployment, which traditionally lags growth, would rise to 10.7 percent in 2010 and hit 10.9 percent in 2011.

The latest 2010 figure was a sharp improvement on a previous forecast of 11.5 percent but the underlying increase remains in place.

Alarmingly for the commission, the EU's budgetary watchdog, the new figures also showed public deficits were set to triple this year to reach 6.4 percent of Gross Domestic Product (GDP), more than double the limit of 3.0 percent.

As governments try to spur growth, the commission predicts that the overall eurozone government deficit will increase to almost 7.0 percent of GDP in 2010.

A total of 20 of the 27 EU nations have so far been warned for breaching the bloc's guidelines, which allows some leeway in hard times but that are supposed to be respected over time.

"The EU economy is coming out of recession," Economic and Monetary Affairs Commissioner Joaquin Almunia said.

"However, the road ahead is a challenging one," he warned.

"To maintain momentum and support the sustainability of the recovery, it is essential that we fully implement all announced measures and complete the repair of the banking sector."

Almunia said he would be recommending to finance ministers next week that both the eurozone and the full EU commit to implement so-called 'exit strategies' in 2011.

EU finance ministers agreed in Luxembourg late last month that they would start reducing bloated deficits from 2011 "at the latest" -- but only on the condition that the ongoing economic recovery is sustained.

Luxembourg Prime Minister Jean-Claude Juncker, who heads the Eurogroup, warned that if "major countries are stepping away from a policy of virtue, smaller countries, mainly those surrounding these countries, would have great difficulties" explaining why they should stick to EU rules.

The eurozone unemployment rate rose to 9.7 percent in September, with 15.65 million people out of work.

Unemployment in the EU as a whole also hit its highest level since comparable records began in 2000 -- with 22.123 million people on the dole.

Chopping away at deficits and debt will have to wait until growth reduces the cost of social security linked to unemployment and pushes up tax revenues.

The head of the commission's economic and financial affairs department, Marco Buti, underlined that the jobless rate and deficits will have to be tackled soon to bolster the emerging recovery.

"It will be key to tackle the labour-market and debt challenges identified to ensure the transition to a solid sustainable recovery further out," he said in the EC report's introduction.

"Addressing these challenges with determination will allow the EU economy to emerge stronger after the crisis."

The commission's report noted that short-term policy measures and the impact of some previous job market reforms had mitigated the impact of unemployment.