Brussels, 08/07/2008 (Agence Europe) - Prospects for growth and inflation were the main subjects of the Eurogroup debate on Monday 7 July. Despite the clear slowdown in growth and criticism from, France, in particular, about the increasing difference in interests rates in Europe and the US, ministers from the EU15 closed ranks and approved the European Central Bank's (ECB) anti-inflation policy and its recent decision to raise interest rates (EUROPE 9696).
After a healthy start in economic activity in the first quarter of the year, a slowdown in growth has clearly been observed since then. Jean-Claude Juncker informed the press that, “at this stage, we think that the second quarter will be significantly less promising” than the previous quarter, which has been borne out by confidence indicators. If the results turn out to be much worse than those registered during the first three months of the year, a revision in the Commission's economic forecasts is not being ruled out. Since publication of the figures for spring, in April, risks for a fall in growth have significantly increased, acknowledged Joaquin Almunia, who is awaiting figures for the second quarter at the beginning of August and will present his intermediate forecasts in September. The commissioner for economic and monetary affairs stressed that at this stage, “we have to wait” but, “with information available today, we mustn't be too optimistic”.
Mr Juncker recognised that “we are all concerned about inflationary developments” which are a “concern to both the monetary and political authorities”. The Eurogroup president asserted that “we think that the fight against inflation is of the highest importance and also the responsibility of the ECB, which has assumed its responsibility. The recent ECB decision was not criticised this evening but it is also the responsibility of governments to help in this combat by giving up a certain number of political acts they might envisage, such as an increase above what was planned at the beginning of the year for indirect taxation”.
Mr Almunia indicated that with regard to the current high figures (4% in May), price rises are as follows: a third result from oil price hikes; a third from food price rises and another third from other consumer prices, particularly in the services sector. In this context, “the public authorities must pay close attention not to use indirect taxes and administered prices too much…to prevent the risks of second round effects materialising”. These effects are still only a risk rather than a concrete phenomenon but watch out! Mr Almunia warns that “the current shock of inflation is very strong and if, in addition to this external shock, we were to add inflationary pressure through the effects of the second round, the situation would be at risk of becoming difficult to manage. It is a source of concern”. Following last week's decision by the board of governors, Mr Juncker provided assurances that “we all believe that the ECB is right to vigorously assert, as it has done, the need to focus on mid-term inflation forecasts”. Without mentioning possible future monetary policy at the Eurogroup, Juncker did, however, say that he did not consider “that last Thursday's decision was the beginning of a new cycle of adjustment towards higher interest rates”. Although we have to get used to the fact that oil prices are to remain very high over the coming months, this does not mean that national governments cannot implement accompanying policies to protect the most vulnerable sections of society by stabilising their purchasing power. Nevertheless, Mr Juncker affirmed that there is no question of accompanying inflation with wage rises that are not linked to rises in productivity. Juncker also pointed out that finance ministers would be making examinations (based on the Commission analysis) of “all components that can help to explain the partly unorthodox functioning of the oil market”. This was requested of them during the most recent European Council and speculation was identified as being part of the problem, although it is above all linked to supply and demand. Mr Juncker supports the proposal of the Italian finance minister, Giulio Tremonti, mentioned on Monday, which suggests that Article 81 and 82 in the treaty (on cartels and abuse of dominant position) are used in the Commission's analysis for tackling speculation on the oil and food markets - the same applies to the French proposal for putting a ceiling on value added tax (VAT) but there is some caution in this regard. The suggestion was not taken up by everybody, Mr Juncker again explained, because VAT revenue trends vary sharply from country to country (in some, VAT receipts have increased and in others they have fallen). He believes, therefore, that “we cannot transpose the same causes from one country to another” and pointed to the decision made by the Eurogroup ministers at the informal Manchester meeting in September 2005. At the time, the EU12 agreed not to impose tax measures to tackle short term oil prices and Mr Juncker concludes that “as a consequence, we do not think that France's suggestion is the only one that is worthy of examination”. (A.B./transl.rh)