BUDAPEST, Sept 17: The European Commission will cut its forecast for economic growth of 1.6 per cent in the euro zone this year because of high oil prices which slow growth, Economic and Monetary Commissioner Joaquin Almunia said on Friday.
Almunia said during a visit to Hungary that the 1.6 per cent growth forecast, made in April, was based on the assumption that crude oil prices would average $50.90 a barrel this year.
But current prices are over $60 per barrel and are expected to remain high.
The Commission is due to revise its forecast in November. Almunia did not say by how much the April forecast would be missed.
But European Union finance ministers and the European Central Bank have already cut their forecasts for euro zone growth in 2005 to 1.3 per cent.
Almunia said the euro zone economy would accelerate toward the end of the year as demand from China and India as well as the 10 new EU member states helped EU exports.
I hope, when we make public our next forecast in November, we will look for a growth rate below this 1.6 per cent for the euro zone but with a good evolution and with a positive impact looking to next year, Almunia told a news conference.
An ECB study showed on Tuesday that one of the ways to boost growth quickly was to cut government spending, a move that it said would help exports, productivity, investment and consumption within a year.
Almunia, who is in charge of enforcing the EU’s budget deficit limits contained in the Stability and Growth Pact, has long called for tighter budgets among EU states, arguing that more prudent fiscal policy would boost growth.
Germany and France, which have been running budget deficits above the EU’s 3 per cent of GDP ceiling since 2002, in March pushed through a reform of the pact which gave them more leeway for cutting their deficits.
France has pledged to bring its deficit down to 3.0 per cent this year. But Germany will end 2005 closer to 4.0 per cent.
The litmus (test) of the credibility of the new pact will be when we face the German situation, Almunia said.
German conservative leader Angela Merkel has a marginal lead in opinion polls ahead of Sunday’s election. The conservatives have pledged to bring Germany’s deficit below 3 per cent by 2009. Current Chancellor Gerhard Schroeder has left the timing open.
Speaking at a campaign rally in Berlin late on Friday, Merkel said: There must be no weakening of the Stability Pact. There must be solid budgetary policies in Germany again.—Reuters
