With the world markets in turmoil over recent past taking their toll, the European Monetary and Economic Commissioner Joaquin Almunia last week lamented that financial markets are continuing for longer than previously expected, adding to fears that the longer they go on the greater the risk that they will affect the real economy. Criticising an International Monetary Fund (IMF) report which said growth in the Eurozone would be about 1.6 percent in 2008, Almunia called the projections pessimistic. Allaying fears that the Eurozone is not heading for a recession, Almunia said, “We are in a slowdown but growth will be maintained.”
On the other hand, Almunia said, “I am very concerned about inflation,” blaming the “incredible” inflationary trends on external forces such as spiralling upwards food and oil prices. Expecting the inflation rate to stay “too high” in short term, Almunia expected an average of 2.6 percent for the full year 2008. According to the preliminary figures release by Eurostat, the Eurozone inflation rate rose 3.5 percent in March, the highest rate since the currency union was founded a decade ago, twice the rate of a year ago, and far above the European Central Bank’s two percent target.
Pointing out that some upside inflation risks had materialised, Almunia reiterated warnings to guard against second-round effects, hinting at a revision of the European commission’s 2008 average inflation forecast up from the 2.6 percent projection made in February. The commission is due to publish new forecasts at the end of April.
Adding his voice to the concerns, Luxembourg Prime Minister Jean-Claude Juncker told journalists after a meeting of the Eurogroup at Brdo pri Kranju on April 4: “We remain very concerned about the level of inflation... it is a concern for all governments.” “But inflation should also be a matter of concern for the unions and it should influence the measures they take. Inflation is above all a risk to those with low purchasing power,” Juncker added.
In the same vein, European Central Bank (ECB) President Jean-Claude Trichet singled out administrative prices, indirect taxation and competition in all markets as the areas where governments need to be vigilant.
Trichet said price stability was “essential for the poorest and the most vulnerable of our citizens.” “It is extremely important that we understand that moderation today is necessary if we want to deliver price stability in the medium term,” he said. Trichet cautioned member states against undertaking wage increases akin to those agreed in Germany for the public sector, saying the situation there was unique considering that wages have remained level for three years.
“The European Central Bank is assuming its responsibilities but governments should also complement this monetary policy stance at many levels,” said Almunia.
Slovenian Finance Minister Andrej Bajuk meanwhile pointed to another threat to economic growth - exchange rate volatility. “The exchange rates must reflect the economic fundamentals of every economy.” This would be the “joint message” of the finance ministers at next week’s spring meeting of the International Monetary Fund and World Bank, he said.
“Prospects for Europe are somewhat better than many had anticipated. The fact is that the European financial system is much more solid than the US system. We are all aware that risks exist, but according to my information... nobody can say that Europe is in a kind of recession.” Slovenia holds the rotating sixmonth EU presidency for the first half of 2008.