Brussels, 06/11/2006 (Agence Europe) - In 2006, the European economy will reach its best level since the beginning of the decade, the European Commission points out with Monday's publication of the autumn economic forecasts. After a particularly disappointing year in 2005 (1.7% in EU25 and 1.4% in the euro area), growth should be 2.8% and 2.6% respectively in 2006. These figures reviewed upward compared to the spring economic forecasts (EUROPE 9187) confirm the trend of the intermediary report in September (EUROPE 9259). With risks falling, according to Joaquin Almunia, the rate of growth should slow down in 2007 and 2008, due above all to the uncertainty surrounding forecasts for the US economy. Nonetheless, the impact that the slowdown in growth in the United States will have on the European economic situation remains weak as activity in Europe is above all based on domestic demand, the Commissioner for economic and monetary affairs told the press. GDP growth should thus remain close to its potential during the next two years, with 2.4% in 2007 and 2008 for the EU25 and 2.1% and 2.2% for the eurozone. Such prospects should encourage Member States to pursue economic reform and budgetary consolidation, the Commissioner stressed.
Internal demand is the main driving force behind growth in Europe, thanks above all to the importance of investment (mainly in equipment), Mr Almunia said. He foresees a rise to a “sustained” rate of household consumption, following a favourable evolution of the labour market. As far as employment is concerned, the situation is sound and there could possibly be a fall in the unemployment rate from around 8% in 2008 (compared to 9% in 2004) to 7.3% in the EU25 and 7.4% in the euro zone in 2008. The EU is expected to create 7 million new jobs, including 5 million in the eurozone, the Commissioner predicts, saying that the unemployment rate could go from 63.8% in 2005 to 65.5% in 2008. Such an improvement, he regretted, will not however allow the Lisbon goals to be reached with regard to employment (70% employment rate for the EU as a whole).
Inflation should gradually fall below the 2% mark by 2008. Still above the price stability objective of the European Central Bank (ECB), it is nonetheless contained at 1.6% if one excludes the rise in energy prices from the calculation. The rise in oil prices have therefore had significant second round effects and the Commission's forecasts table on such effects being absent for good and on salary moderation. The Commission forecasts a rise in crude oil per barrel from an average of $65.6 in 2006 to $66.6 in 2007 and $68 in 2008, an increase that is far less than the 21% recorded compared to 2005. The three-point rise in VAT decided by Berlin from 2007 “will be felt”, Mr Almunia nonetheless explained, evaluating the impact that this measure will have on the general price level at one percentage point in Germany and 0.3 percentage points in the eurozone. The effect, however, will only be “temporary” as, over the whole of the period (from 2006 to 2008), “there will be no impact”.
Public finance looks better than foreseen with bigger receipts. The average budgetary deficit should be around 2% this year in both the eurozone and the EU as a whole, compared to 2.4% and 2.3% respectively in 2005. It will continue to fall to settle at 1.5% in 2007 and 1.3% in 2008 in the eurozone and at 1.6% and 1.4% in the EU25 according to the Commission, which is also tabling on a decline in the public debt. As far as the latter is concerned, the trend would therefore be reversed as, after the rises observed over the past three years, it would go from 70.6% of GDP on average in the eurozone and 63.3% in the EU25 in 2005 to 69.4% and 62.5% respectively in 2006, before reaching 66.9% and 60.4% in 2008. This shows that the revised Stability Pact works properly, Commissioner Almunia was pleased to state, although he listed five Member States that are still in excessive deficit situation this year (Portugal, Italy, Czech Republic, Hungary and Slovakia).
Excessive deficit procedures: optimism for some, vigilance for others
Germany and France have already carried out a “major correction” of their public deficit and the Commissioner will be suggesting that his counterparts repeal the proceedings initiated against Paris during the meeting of the College on 29 November. Ministers will be looking at the Commission recommendation in January. Unlike France, Germany had not returned below the 3% threshold in 2005, so that the procedure against Berlin will only be repealed when the 2006 figures are final. If, as everything points to, Berlin manages to reduce its deficit to 2.3% this year, the Commission will make a proposal along these lines under German Presidency of the EU, Mr Almunia said.
If the 2007 budget is adopted as planned and implemented strictly, Italy's objective for next year will be achieved in line with the recommendations of the Council, repeated the Commissioner, who expects a level of 2.9% of GNI. Rome should nonetheless take other measures to remain below 3% in 2008, particularly attacking the expenditure plank by dint of structural reforms, he warned. In Portugal, the "large-scale" adjustment should help to bring the deficit of 6% GNI in 2005 down to 4.6% in 2006, but not to bring it under 3% in 2008. This means that further measures will be required if Lisbon hopes to adhere to the timeline recommended by the Council.
The current deficit figures for Poland are within the limits of the SGP, but they do not take account of the costs of pension reform, which, once included in the figures, will alter the deficit to the tune of two percentage points, the Commissioner went on to stress, which means that following an identical policy, the real Polish deficit would thus stand at 4% in 2007. The adjustment policies for the public finances are "not ambitious" in the Czech Republic or Slovakia, he went on to complain, noting that Bratislava will come in just below 3% in 2008, and that if no further measures are taken between now and then, Prague will still be registering a deficit of 3.2%.
According to the current figures, Cyprus and Malta, the two Member States hoping to adopt the single currency on 1 January 2008, "will respect the inflation, debt and deficit criteria", Mr Almunia went on to explain. Their candidacy to join the euro will be assessed only when they have formally applied to do so, he explained, adding that this could happen early in 2007, to allow the Commission and the ECB to present their convergence reports around the month of April. For the other countries hoping to join the euro zone, they must concentrate on a "coherent strategy to fight inflation" before an accession deadline can even be established, he stressed. (ab)