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EU ignores economic threat of Brexit as eurozone growth set to falter

Brussels assumes “no policy change” on British membership in its latest economic forecasts for Europe, cutting growth forecasts

A structure of the Euro currency sign is seen through the window on a rainy evening in Frankfurt...A structure of the Euro currency sign is seen through the window on a rainy evening in Frankfurt July 13, 2012. REUTERS/Alex Domanski (GERMANY - Tags: BUSINESS)

A structure of the Euro currency sign is seen through the window on a rainy evening in Frankfurt…A structure of the Euro currency sign is seen through the window on a rainy evening in Frankfurt July 13, 2012. REUTERS/Alex Domanski (GERMANY – Tags: BUSINESS)

Pierre Moscovici, the EU’s economics chief, said the Commission would not speculate on “what if” scenarios

The European Commission expects Britain will still be a member of the EU by the end of 2017, discounting the economic impact of a “Brexit” on the continent.

In its latest three-year economic healthcheck on Europe, which encompasses a British referendum, the Commission assumed a “no policy” change scenario, where the UK will vote to stay in the union.

Britain is set to outstrip growth in the euro’s three largest economies – Germany, France and Italy – hitting 2.5pc this year, followed by 2.4pc in 2016, according to the EC’s Autumn economic forecast.

But the report, which stresses a number of “downside” threats to growth, does not take in to account the risks of a “Brexit” on the domestic or European economy.

“We all expect and want the UK to stay in the European Union which is positive for the EU and the UK itself
Pierre Moscovici

Analysis from investment bank Morgan Stanley predicts Britain will “flirt with recession” in the event of an EU exit, stoking inflation and forcing the Government into expansionary fiscal policy in 2017.

The bank also believes there is a more than one-in-three chance the British electorate will vote to leave when a plebiscite is held before the end of 2017.

• One in three chance Britain will leave the EU, warns Morgan Stanley

http://cloud.highcharts.com/embed/ibajix

But Pierre Moscovici, the EU’s economics chief, said the Commission would not speculate on “what if” scenarios.

“We base our figures on no policy change. But everybody knows [Brexit] would be a more than important policy change,” said the former French finance minister.

“We all expect and want the UK to stay in the European Union, which is positive for the EU and the UK itself.”

Pierre Moscovici, European Commissioner in charge of Economic and Financial Affairs speaks at a press conference

Ireland, currently the euro’s fastest growing economy, has its trade and investment fortunes closely inter-twined with Britain. The Commission tacitly acknowledged that Brexit would affect the Irish economy, but did not flesh out any of the fall-out from a “Leave” vote.

A separate report from the Dublin-based Economic and Social Research Institute estimates Ireland’s bilateral trade would fall by 20pc and the economy would face higher energy prices if Britain was no longer part of the single market.

Faltering EMU

Growth forecasts for the eurozone were cut as the bloc is expected to expand at a subdued but steady rate over the coming years.

GDP growth in the 19-country bloc will fall to 1.8pc next year, against an earlier forecast of 1.9pc, according to the European Commission’s Autumn forecast.

The EU as a whole will grow by 1.9pc, 2pc, and 2.1pc over the next three years, pushed higher by countries outside of EMU.

The difference between economic growth in the euro area and the EU is mainly the result of strong growth performance in the UK, Poland and Sweden
European Commission

The Commission admitted that non-euro economies including the UK, “seem to be less affected by legacies of the crisis such as unemployment and deleveraging pressures”.

“The difference between economic growth in the euro area and the EU is mainly the result of strong growth performance in the UK, Poland and Sweden, which are expected to grow at rates above 2pc in each of the forecast years,” said the report.

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Greece will be the only eurozone country to fall into recession this year, but the Commission’s numbers are an improvement on earlier predictions of a deeper downturn. Greek GDP will contract 1.4pc this year – 1pc higher than projected in August. This will be followed by a 1.3pc contraction in 2016.

However, Greece’s chronic unemployment will rise by 0.1pc to 25.8 in 2016. In the 2014 Autumn forecast, Greece was projected to be the fastest growing economy in the euro, before its bail-out programme was thrown into jeopardy at the start of the year.

Across the bloc as a whole, the Commission stressed weak demand from emerging markets, anaemic global trade and a Chinese slowdown would negate the positive affects of a weak currency and low oil prices.

Mr Moscovici said Chinese growth will be “harder than we forecast”, with Brussels’ economists now expecting growth to slow to 6.8pc in 2015 – in line with IMF forecasts – and to 6.2pc in 2017.

Inflation in the eurozone is expected to remain close to 0pc for the rest of the year, allowing the European Central Bank to keep monetary policy accommodative, said the report. Fiscal policy on the other hand, would have a “neutral” impact on growth after three years of belt-tightening.

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This entry was posted on November 8, 2015 by and tagged , , .

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