European Commission slashes growth forecast for Greece

Brussels drastically slashed its forecasts for the troubled Greek economy on Tuesday, warning the ongoing political turmoil in Athens will lead to almost no growth this year and a return to soaring national debt levels.

The European Commission cautioned that its forecasts, which were based on the status of bailout talks two weeks ago, were contingent on Athens reaching a deal to secure €7.2bn in bailout financing by June and a subsequent return in business confidence and liquidity for both the cash-strapped government and Greek banks.

Even with those optimistic assumptions, however, the commission predicted the Greek economy would grow by only 0.5 per cent of gross domestic product this year, down from a robust 2.5 per cent projection made just three months ago. Unemployment, which was forecast to decline to 22 per cent next year, will now come down to only 23.2 per cent.

"Positive momentum . . . has been hurt by uncertainty since the announcement of snap elections in December," the commission wrote in its 186-page report on all 28 EU economies. "The current lack of clarity on the policy stance of the government vis-a-vis the country's policy commitments in the [bailout] support arrangements worsens uncertainty further."

Critically for the ongoing bailout negotiations, the slashing of economic growth projections will have a significant knock-on effect on public finances, the commission found. Greece's sovereign debt is now expected to jump to an unprecedented 180.2 per cent of GDP this year; in February, the commission had predicted a decline to 170.2 per cent.

Similar still-private projections of renewed debt rises by the International Monetary Fund have in recent days led IMF officials to push eurozone creditors to write off some of their bailout loans to Athens, something national capitals are resisting fiercely.

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A primary surplus is critical in bailout negotiations since it is a key measure of how much debt Greece will be able to pay off on its own. The 2.1 per cent surplus is below the 3 per cent target in the current bailout programme, and next year the commission foresees an even lower surplus of 1.8 per cent. That is down from February's projections of a 4.8 per cent surplus this year and a 5.2 per cent surplus in 2016.

Significantly, the commission sharply cut its estimate of last year's Greek primary surplus, long touted by both Brussels and Athens as the leading sign that the five-year, €245bn bailout was finally bearing fruit.

In February, preliminary figures from 2014 showed Athens had achieved a surplus of 1.7 per cent, its first since the crisis began. But the commission said the failure of many Greeks to pay their taxes during the beginning of the current crisis - which was sparked in December when the previous government failed to get its presidential candidate chosen, forcing parliamentary elections - slashed last year's surplus to just 0.4 per cent.

"The poor revenue collection around the turn of the year resulted in a significantly weaker than expected fiscal outcome for 2014," the commission wrote.

Taken together, the sharply lower surpluses - Greece was originally targeting a 4.5 per cent surplus next year and in 2017 - would force eurozone governments to increase significantly the size of a third Greek bailout when the current rescue expires in June.

Despite the bleak Greek picture, the commission said the wider eurozone was continuing to show signs it was emerging from the worst of its economic crisis and upgraded the currency area's economic growth forecast for the second time in three months.

It now projects eurozone GDP will grow 1.5 per cent this year, up from a predicted 1.3 per cent in February - though it kept next year's projection at 1.9 per cent. Much like February, Brussels credited low oil prices, a depreciating euro and loose monetary policy for the improvement.

"The European economy is enjoying its brightest spring in several years, with the upturn supported by both external factors and policy measures that are beginning to bear fruit," Pierre Moscovici, the commission's economic chief, said in a statement accompanying the report.

Still, the commission warned that among the risk factors that could reverse the economic momentum were "developments related to Greece", as well as continued geopolitical tensions in Ukraine and parts of the Middle East.

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