Alot of wishing and hoping isn’t working, so European Union officials said they are coming face-to-face with the realisation that inflation can’t be stopped just yet, leading to predictions of a slowdown in growth. The economy is putting on the brakes and slowing to a two percent growth rate in the EU, and will lag again at 1.8 percent next year, officials have estimated. They said this was due to soaring commodity prices, the global financial turmoil and the risks of a US recession taking a toll on the world’s largest economy.
According to the latest forecasts by the EU’s executive, the European Commission, gross domestic product (GDP) in the 15-member Eurozone was similarly set to rise by a modest 1.7 percent this year and by 1.5 percent in 2009, after growing by 2.6 percent in 2007. The economy of the 27-member EU as a whole grew by a slightly better 2.8 percent that year. The Commission’s spring forecasts are in line with its February estimates, when 2008 growth was cut by about half a percentage point. “Economic growth is moderating in the EU and Euro area and the current, imported inflationary pressures are a matter of concern,” said EU Economic and Monetary Affairs Commissioner Joaquin Almunia in presenting his spring economic forecasts.
Indeed, inflation has emerged as a major source of concern on the back of a surge in the price of oil, food and other commodities. Average inflation, which had remained just above the two percent mark since 2004, was predicted to peak in 2008 to 3.6 percent in the EU and 3.2 percent in the Eurozone before returning to more traditional levels in 2009. “Inflation has become a major problem for all of us. This was not the case a few months ago,” said Almunia, noting that rising consumer prices tended to punish the weakest sectors of society. “Whilst our economies have proved resilient to the external shocks so far, and we expect continued, albeit slower, job creation, we need to stick to sound macro-economic policies and carefully avoid starting an inflation spiral that would particularly affect low income families,” Almunia said.
He said it was up to governments to get their economies in shape and thus avoid external shocks from making matters any worse. “I will be optimistic if European governments continue to launch and implement structural reforms to increase the resilience of our economies, improve the functioning of our markets, improve productivity levels, be more competitive and develop sectors that can succeed, in these uncertain times, by reaching markets that continue to have very good growth rates,” Almunia said. Officials in Brussels noted that among the reasons why Europe was “in a relatively good position to weather the global headwinds” was the fact that governments had by and large put their public accounts in order, with the EU’s average budget deficit to GDP ratio falling for the first time below one percent in 2007.
But Almunia had strong words for France, which according to commission estimates is the only Eurozone country that risks breaching the upper three percent limit in 2009. “Any deviation from that forecast in public spending ... would lead to a possible excessive deficit in France,” Almunia said. The launch of an infringement procedure against France would represent a major blow to the country just as it prepares to take over the six-month rotating presidency of the EU on July 1.