EU sees 2010, 2011 recovery, makes case for fiscal exit

By Jan Strupczewski

BRUSSELS (Reuters) - Europe's economy will rebound next year from a deep slump and accelerate in 2011, the European Commission said on Tuesday, paving the way for major budget deficit cuts across the 27-nation bloc from 2011 at the latest.

The European Union's executive arm forecast that the EU economy would expand by 0.7 percent in 2010 and 1.6 percent in 2011 after a contraction of 4.1 percent this year.

In the 16-country euro zone, growth would be 0.7 percent next year and 1.5 percent in 2011, after a 4.0 percent fall in 2009. This is a strong upward revision from its forecast on May 4, when the Commission projected the euro zone to contract by 0.1 percent in 2010.

EU finance ministers agreed on Oct. 20 and EU leaders backed them last Friday that if the Commission forecasts showed the recovery was strengthening and self-sustaining, deficit cuts in all EU countries should start in 2011 at the latest.

"With this forecast I will recommend to Ecofin (EU finance) ministers next week to declare or confirm that 2011 is the year when the EU and euro area start in aggregate terms this fiscal exit strategy," Economic and Monetary Affairs Commissioner Joaquin Almunia told a news conference.

Almunia said the economy was coming out of recession thanks to government and central bank support measures and urged all the announced steps should be still implemented. He also said banks had to be repaired to make the recovery sustainable.

In its forecasts, the Commission quoted an estimate by the Committee of European Bank Supervisors (CEBS) from Oct 1 which said that future potential losses due to write-downs on loans and securities for euro area banks for 2009 and 2010 were in the range of some 200 to 400 billion euros.

"Without further repairing of balance sheets of many banks, credit flows will not be at normal levels and without normal credit flows we will not have a sustained recovery in our economy," Almunia said.