Ireland: Recovery lagging behind rest of Eurozone

European  economies are recovering at different speeds which may complicate any efforts by the ECB  to put the Eurozone back on track to a more stable economy.

As the global economy recovers and Germany and France return to growth, the European Commission yesterday cut its forecasts for Spain and Italy. Deutsche Bank  says some of the economies  may stay in recession in 2010 .

The risk is that a recovery in the largest euro nations will prompt the ECB to tighten policy and raise interest rates  before smaller countries like Ireland and Spain are ready. This will possibly restrict these economies that are already struggling with  falling  house prices and  rising  unemployment. That will make it harder for governments and consumers to pay interest on their mounting debt, potentially pushing their borrowing costs higher.

“The ECB will have to normalize rates from next year and it will hurt countries like Spain and Ireland which will still be in recession and burdened by piles of debt,” said Gilles Moec, an economist at Deutsche Bank in London. He forecasts the ECB will double its benchmark interest rate, currently at a record low of 1 percent, by the end of 2010.

According to the OECD – Ireland’s  households are already among the most indebted in the euro region. The Irish economy is forecast to  contract  1.5 percent in 2010 and will proably post the Eurozone’s  biggest budget deficit – while Germany and France are forecast to will both expand 0.2%.