The eurozone will struggle to emerge from a double-dip recession next year as deep budget cuts stifle growth, the European commission has said. In a gloomy health check on the state of the 17 countries that belong to the monetary union, Brussels said a sharper than expected fall in output in 2012 would be followed by a virtually non-existent recovery in 2013. The commission said the eurozone as a whole would contract by 0.4% this year and grow by 0.1% in 2013. It cut its forecasts for the single currency's "big four" economies – Germany, France, Italy and Spain – as it predicted that unemployment would rise to a fresh peak of 11.8% next year.
"Europe is going through a difficult process of macroeconomic rebalancing, which will still last for some time," said the economic and monetary affairs commissioner, Olli Rehn. "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."
Brussels blamed the deepening sovereign debt crisis and financial market concerns about a possible breakup of the eurozone for the "disappointing" growth performance in 2012. It said domestic demand would make no contribution to eurozone GDP in 2013 as the lack of jobs and tax increases hit consumer spending.
The commission expressed confidence that by 2014 the benefits of the austerity programmes would bear fruit, leading to expansion of 1.4%.
Although the UK is expected to grow by just 0.9% next year, Brussels believes it will expand more quickly than any of the major economies of the eurozone. The commission has pencilled in growth of 0.8% for Germany, 0.4% for France, a contraction of 0.5% for Italy and a retrenchment of 1.4% for Spain. In all cases the predictions are for output to be weaker than expected by national governments, leading to budget deficit reduction targets being missed.
Greece is one eurozone economy where the commission's forecasts are less pessimistic than those of the government. The EU executive believes the Greek economy will shrink by 6% this year and 4.2% in 2013 before finally emerging from a six-year slump with growth of 0.6% in 2014. The government is assuming contraction of 6.5% in 2012, 4.5% in 2013 and growth of 0.2% growth in 2014.
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Talks to agree the EU's 2013 budget have collapsed, after negotiators from the EU and member states were unable to agree on extra funding for 2012.
The EU Commission and European Parliament had asked for a budget rise of 6.8% in 2013.
But most governments wanted to limit the rise to just 2.8%.
The failure of the talks will dent hopes of agreement on the 2014-2020 budget, which is up for discussion later this month, correspondents say.
Friday's dispute was over an extra 9bn euros (£7bn; $12bn) in "emergency funding" for 2012, to cover budgets for education, infrastructure and research projects.
But Germany, France and other governments questioned the funding, and eight hours of talks produced no agreement.
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Ahead of a meeting of eurozone finance ministers, International Monetary Fund officials and the European Central Bank on Greece on Monday, the official made plain that there was unlikely to be any quick agreement. Privately senior officials in Brussels say that the Europeans and the IMF are in deep dispute about Greece, meaning that little can be resolved and "everything is open."
Monday's meeting, postponed from this week, had been expected to sign off on the big tranche of loans delayed since the summer, after the Greek parliament's adoption of a new austerity package this week and its anticipated passing of a new budget on Sunday.
"One round of discussions may not suffice to come to a final decision on the whole package," said the official. "I am not pretending we'll come to a result and a solution on this. There's a high degree of possibility of the need for a second round of discussions."
He made it plain that there could be no further loans until that decision was taken.
The long-awaited report on Greece from the troika of IMF, ECB, and European Commission officials is expected at the weekend before Monday's meeting. It will report on Athens' compliance with the bailout terms and also include a "debt sustainability analysis" which is the main sticking point and the focus of the row between the IMF and the Europeans.
At IMF insistence, the bailout terms stipulate that Greek national debt may be no higher than 120% of gross domestic product by 2020 to qualify for the verdict of being sustainable. The troika report is certain to state that this goal is unachievable.
The official raised the prospect of extending that deadline to 2022. Eurozone officials had been seeking to "decouple" the debt sustainability issue from the release of the tranche of loans, but have given into IMF pressure to link the two factors.
Several eurozone governments would only be prepared to release the loans "once [the debt] is seen as sustainable and we are convinced of this," said the official.
Some €5bn of Greek short-term debt will mature next Friday, and it will not have the money to repay the loans unless the next aid tranche is released. The ECB is under pressure to give Greek banks permission to hold more of the country's sovereign debt, allowing the €5bn of bills to be rolled over.
The official emphasised that Athens would not be allowed to default on the debt, meaning that the ECB may act.
Despite IMF pressure on the eurozone and the ECB to write down their loans to Greece and take losses, the official said the ECB "won't tolerate any haircuts on its Greek bond holdings." The German government takes a similar stance.
There is broad agreement that the Greek bailout regime has to be extended by two years to 2016, generating a financing gap of up to €30bn. But there is no deal on how to fill that hole. Debt buybacks ("much more complicated than you can imagine"), lower interest rates on the eurozone loans and extending their maturities were all being considered.
But the official said that Greece's cash needs for this month and next should be "easily covered".
Most Greek workers, certainly the ones most affected financially by what's beng forced on them, are taxed at source. They don't have a way of not [paying their taxes.
The evaders are, by and large, the wealthiest Greeks who have been, and still are, allowed to funnel their money out of the country into tax havens. If the average Greeks who don't have those sort of options are to blame for anything, it's their dogged insistence on voting for the same two parties that keep this system of corruption going. I lost a lot of sympathy for the Greeks when they voted to keep the Pasok-New Democracy sham in place. Syriza would have at least called the troikas bluff. Maybe.
As for French, German, and Slovak tax payers, their governments have done an outstanding job of shifting the blame for all this away from their own financial institutions that made bad loans, and onto the Greek people. As siren45's url shows, the largest chunk of the bailout money goes back to EU financials. Some time back The Daily Beast posted an article detailing that German private banks had over lent to the tune of 700 billion Euros to Greece, Italy, Portugal, Spain and the like. That sum adds up to more than they had in their reserves. Much more. What Merkel is doing is saving her party's own skin by forcing the Greeks into absolute poverty to get these banks paid back, thus avoiding having to bail them out at the national level. Genius plan politically, but utterly disgusting on anything resembling morality.
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