Europe outlook at G20 clouded by eurozone strains

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Germany, France and Britain head to a G20 summit Thursday bolstered by promising growth prospects but the wider European picture is clouded by investor unease over the financial health of struggling eurozone members.

The European Union's three leading economies got a favorable review on Wednesday that should strengthen their hand when the Group of 20 rich and emerging market nations gather in Seoul to examine the status of the global recovery.

But there is tension elsewhere in Europe, notably in financially ailing eurozone members Portugal, Ireland and Greece, whose debt and deficits have driven up their borrowing costs and raised questions about the fate of the 16-nation currency bloc as a whole.

On Wednesday, yields on Portuguese and Irish bonds shot up to their highest levels since the creation of the eurozone in 1999 despite commitments by governments in both countries to slash spending.

Britain faces a less uncertain future, according to the Bank of England, which said in a report that the economy would avoid a new recession despite unprecedented government austerity measures.

The BoE forecast that growth would be "broadly similar" to predictions in its August report, with the recovery peaking in the second half of 2010 before easing to an annual rate of 2.5 percent next year.

"The considerable stimulus from monetary policy, together with a further expansion in world demand and the past depreciation of sterling, should support recovery," the bank said.

Britain's economy grew by a robust 0.8 percent in the third quarter, twice as fast as expected and soothing fears of return to recession.

The picture of robust activity came shortly after the coalition government delivered Britain's biggest public spending cuts for decades, fanning fears that they could help push the country back into another downturn.

In Germany, the EU's largest economy, a panel of experts said the country was set for a powerful economic bounce-back this year before a slight slowdown in 2011.

The so-called "Five Wise Ones," economic advisors to Chancellor Angela Merkel, were even more bullish on the economy than the government itself in their annual report, seeing growth of 3.7 percent this year and 2.2 percent in 2011.

Merkel's government puts growth at 3.4 percent in 2010 and 1.8 percent next year.

France meanwhile is on track to meet or exceed its official 1.5-percent growth target this year, with the statistics body INSEE foreseeing a pick-up in momentum over the second half, analysts said.

"Our growth projection, based on the robust performances of September and October, is ... for 0.4 percent growth in the third and fourth quarters and 1.5 to 1.8 percent for the year," said Michel Martinez of Societe Generale.

But dampening the European outlook is the situation in Portugal, Ireland and Greece.

While Portugal managed to raise 1.242 billion euros (1.7 billion dollars) through the issue of six- and 10-year bonds Wednesday, success came with a cost.

The 10-year bond carried a yield of 6.806 percent compared with 6.242 percent at a similar operation on September 22. The yield on the six-year bond came to 6.156 percent against 4.371 percent in late August.

Wednesday's yields were the highest Portugal has had to pay since the eurozone was established 11 years ago.

The yield on 10-year Irish paper meanwhile jumped at one point to 8.180 percent, also its highest level since the creation of the eurozone in 1999, reflecting investor fears that parliament might reject a 2011 budget that calls for spending cuts of 6.0 billion euros.

Looming in the background are the economic troubles of fellow EU and eurozone member Greece, where press reports on Wednesday said the public deficit this year could top 9.0 percent of output rather than the 8.1 percent targeted by the government.

On Tuesday, Greece raised 390 million euros (544 million dollars) in a sale of six-month treasury bills but -- like Portugal -- had to offer steeper terms to attract investors.

The yield offered was 4.82 percent, compared to 4.54 percent for an equivalent treasury bill issue worth 900 million euros a month earlier.

© 2010 AFP

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