BRUSSELS, Dec 3: Senior eurozone officials are painting a grim picture of the currency bloc’s growth prospects ahead of a much-anticipated European Central Bank move later this week to slash interest rates.
“Eurozone growth will end up slightly lower than envisaged at 0.8 per cent in 2002,” warned Greek Finance Minister and eurogroup chairman Nikos Christodoulakis, following a meeting of eurozone finance chiefs late Monday.
Growth next year will remain at 1.8 per cent but a “very healthy rate of 2.7 per cent” was expected in 2004 provided oil prices remained at current levels, Christodoulakis said.
The eurogroup chief refused to comment directly on chances of an ECB rate cut on December 5 but acknowledged that eurozone ministers had discussed “all questions related to growth.”
However, Austria’s Finance Minister Karl-Heinz Grasser insisted that “psychologically we need very important signals from the ECB” to boost flagging eurozone economies. “All indications are that the (ECB) sees some leeway,” added Dutch Finance Minister Hans Hoogervorst.
Recent comments from ECB officials have prepared markets to expect the Frankfurt-based Bank to lower rates for the first time since November, 2001.
Speculation is focusing on whether the bank will cut rates by a quarter or half a percentage point. Ministers hinted they preferred a larger cut. “I’m sure the ECB has a lot stored up for Thursday,” said Austria’s Grasser.
The ECB’s key refinancing rate has stood at 3.25 per cent since Nov 8, 2001, despite calls for a cut to inject some life into Europe’s sluggish economy. Duisenberg has resisted cutting rates while inflation across the 12-nation eurozone exceeds the ECB’s 2 per cent target.
In another blow to eurozone morale, European Monetary Affairs Commissioner Pedro Solbes has warned that general government deficits in the bloc were expected to widen to 2.3 per cent of GDP in 2002 “with not much improvement foreseen for the following year.”
The commission has formally issued an unprecedented “excessive budget deficit” rebuke against Germany, the bloc’s largest economy, following signs that Berlin’s budget deficit would rise to 3.8 per cent of GDP this year, breaching a eurozone stability pact threshold of 3 per cent of the GDP.
The commission forecasts Germany’s budget deficit at 3.1 per cent in 2003. Portugal has also been formally reprimanded while France has been warned on its rising budget deficit.
Meanwhile, striving to overhaul the stability pact following recent criticism, Solbes has called for tougher action against governments which fail to reduce debt levels accompanied by leniency in applying the rules to countries with sound finances.
Key changes proposed by the commission include a new focus on national debt, in addition to the stability pact’s emphasis on preventing high budget deficits.
Signalling a further toughening of eurozone rules, the commission has said it wants to use the pact’s early warning system against nations which “embark on adventurous policies in periods of expansion.”
In more upbeat mood, eurozone officials are predicting a strengthening international role for the euro, including increased use in energy supply contracts.
