By Tom Fairless
BRUSSELS--The European Union forecast Monday that inflation in the euro area would drop more than expected this year and next, adding to pressure on the European Central Bank to do more to protect the region's tenuous economic recovery.
Economists at the European Commission, the EU's executive arm, said euro-zone inflation was likely to average 0.8% this year and 1.2% next year, down from a February forecast of 1% and 1.3% respectively.
Marco Buti, director-general of the commission's economics division, said such "very low EU-wide inflation" is making it more difficult for vulnerable countries to improve their competitiveness and reduce debt.
Still, the likelihood of outright deflation--defined as a generalized and self-enforcing fall in prices--in the 18-member euro area as a whole remains very low, the commission said. Deflation can stifle economic growth because it suppresses demand.
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The ECB's Governing Council is due to meet in Brussels on Thursday to discuss interest rates and potential stimulus measures aimed at driving inflation closer to its target of just below 2%.
A month ago, ECB President Mario Draghi said the central bank had discussed the kind of extraordinary stimulus measures it has long resisted, including large-scale bond purchases, as a means to push up prices.
Europe's 5-year-old financial crisis has eased in recent months, but its legacy remains in the large amounts of debt owed by businesses and particularly governments. Many countries are still struggling to curb budget deficits that swelled during the crisis to prop up floundering economies, with some--notably France--likely to miss EU targets.
Low inflation aggravates those debt burdens by making it more difficult to pay them off.
The commission's thrice-annual forecasts serve as a guide for how much austerity governments are expected to undertake to meet the EU's budget rules, which generally require deficits under 3% of gross domestic product.
France was supposed to reduce its budget deficit to 3% of GDP by 2013, but the commission extended that deadline by two years because of the impact of the debt crisis. The commission said Monday that it expects France to miss the new target, and to post a budget shortfall of 3.4% in 2015.
French Finance Minister Michel Sapin said that his government remained committed to getting the deficit down to 3% next year. He said the commission didn't take into account all the saving measures the government has announced.
The EU predicted that overall growth would gain pace over the next two years, driven by rising business and consumer confidence as well as less uncertainty and focus on debt reduction linked to the euro crisis.
The impact of budget austerity is also expected to weigh less on growth than it has in recent years, as the bulk of cuts have already been implemented.
The commission forecast growth in the euro zone would reach 1.2% this year and 1.7% next year following two straight years of contraction. That modest expansion will gradually erode the unemployment rate, still 12% last year, to 11.8% this year and 11.4% next year, the commission said.
In the full, 28-nation EU, growth is expected to reach 1.6% this year and 2% next year, driven by strong momentum in the U.K.
The recovery is being underpinned by business investment and, to a lesser extent, consumer demand, the commission said. Rising confidence and weaker energy prices also are helping consumers.
However, new threats to growth have emerged, notably the mounting tension with Russia over the continuing crisis in Ukraine.
Siim Kallas, the EU's economics commissioner, said the crisis would be costly for Russia and have a "secondary impact" on Europe. Cyprus, Finland and other countries with close economic links with Russia would be the most vulnerable, he said.
The commission raised its growth forecast for Spain in 2015 to 2.1% from 1.7%, citing improved confidence and stabilization in financial markets since the country exited its bailout. EU officials say Spanish firms are becoming more competitive thanks to new laws that release employers from collective-bargaining agreements.
Greece's economy is expected to expand by 0.6% this year, and growth is set to accelerate to 2.9% in 2015, the commission said. Italy's growth is set to remain sluggish, at just 0.6% this year and 1.2% next year, as difficult labor market conditions weigh on consumer demand.
Mr. Buti called on so-called core euro-zone countries to push through measures to boost consumer demand and support the bloc's recovery. Germany in particular has faced criticism in recent years for not doing more to boost consumption.
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