EU upgrades outlook but Greece woes deepen

The EU upgraded its growth outlook for the eurozone Tuesday on the back of cheaper oil and a weak currency, but a sudden worsening of Greece's economic woes cast a pall over the brightening situation.

The improved Spring Forecast report said the single currency bloc would avoid much feared deflation as the 19-country area claws its way back to levels last seen before the global financial crisis.

"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," said EU Economic Affairs Commissioner Pierre Moscovici.

"But more needs to be done to ensure this recovery is more than a seasonal phenomenon."

The European Commission forecast that the eurozone would grow 1.5 percent in 2015, better than the 1.3 percent predicted in February, and by an unchanged 1.9 percent for 2016.

Growth for the 28-nation European Union as a whole -- including major non-euro nations such as Britain -- is forecast at 1.8 percent in 2015 and 2.1 percent in 2016.

The picture varies markedly across the eurozone.

Germany, Europe's economic powerhouse, is expected to grow by 1.9 percent in 2015, above the EU average, helped by domestic demand and an improving labour market.

France's sluggish economy should expand by a much slower 1.1 percent but its budget deficit outlook has improved, making Paris less likely to face embarrassing penalties for breaking EU rules on public spending.

The public deficit in the eurozone's second biggest economy would hit a still high 3.8 percent of gross domestic product this year, but that is lower than the 4.1 percent predicted only three months ago and much nearer the EU limit of 3.0 percent.

Ireland and Portugal, which have both left international bailout programmes, are expected to pick up the pace, with Ireland's 3.6 percent being the highest in the eurozone.

Cyprus however is stuck in recession three years after its bailout and will not return to growth until next year, the Commission said.

- Greek gloom -

But the gloomiest prognosis is for Greece, due to the drawn-out battle between the new leftist government of Prime Minister Alexis Tsipras and the debt-hit nation's EU and IMF creditors.

With fears growing of a Greek exit form the euro, Greece's economy slumped severely in the first three months of the year.

The Commission accordingly slashed its overall 2015 growth outlook to 0.5 percent, a huge tumble from its earlier estimate of 2.5 percent.

It predicted Greece would rebound strongly with 2.5 percent growth in 2016.

"In light of the persistent uncertainty, a downward revision has been unavoidable" Moscovici told a news conference ahead of a meeting with Greek Finance Minister Yanis Varoufakis.

The "meagre" 2015 growth estimate is also on condition that Greece reaches a deal with its creditors by June on its bailout, added the EU's Commissioner for the euro, Valdis Dombrovskis.

Greece's debt, already the highest in the eurozone, would meanwhile soar to 180.2 percent of annual economic output this year, before falling slightly to 173.5 percent in 2016.

The Commission predicted that consumer prices will edge up by a minimal 0.1 percent in 2015, but then gain momentum to 1.5 percent in 2016, after the eurozone came out of deflation last month.

Deflation can be dangerous, risking a spiral of ever weaker demand, slowing the economy and pushing up unemployment.

The inflation data helps confirm that an unprecedented economic stimulus programme -- known as Quantitative Easing -- by the European Central Bank was having an effect.

Unemployment in the eurozone as a whole would drop from 11.6 percent in 2014 to 11 percent by the end of 2015 and 10.5 percent in 2016.

German unemployment in 2015 would sink to a low 4.6 percent while joblessness in Greece would still be worst in the eurozone at 25.6 percent.