EU economists stay cheerful

Date: 06/02/1997

By Tim Jones

THE European Commission is to stick to the optimistic growth and budgetary forecasts it made three months ago despite increasing signs that Germany, the EU's economic locomotive, is stuck in second gear.

In their 130-page annual economic report to be published next week, Commission forecasters still expect Germany's budget deficit to dip below the Maastricht Treaty target of 3&percent; of gross domestic product by December, even after taking last year's overshoot into account.

However, recent data coming out of Germany suggest that the economy is not growing as quickly as had been anticipated.

The budget deficit, which had been targeted to fall to 3&percent; last year and 2.5&percent; this year, was 3.9&percent; in 1996 and - even on the government's own bullish forecasts - will only just average

2.9&percent; this year, with most private economists expecting it to exceed the 3&percent; target.

But with overall Union GDP expected to grow by 2.3&percent; this year, Economics Commissioner Yves-Thibault de Silguy still insists that as many as 12 member states are on course to meet the entry rules for the euro-zone.

“Recent data we have received show that our forecasts are still on track,” he said recently. “Perhaps in two or three months I will say this is no longer the case but, for the moment, our forecasts are valid.”

De Silguy's staff are becoming increasingly confident that their autumn forecasts for growth will not only be met but may even be surpassed, because they were originally based on an assumption that the US dollar would trade around 1.5 deutschemark.

In fact, a surge in the dollar over the past weeks has taken it above 1.6 mark, making continental European exports cheaper.

The report, which contains chapters on each member state, opens with a rosy analysis of the economic picture in Europe as it approaches its rendezvous with the single currency. “With inflation forecast at 2.2&percent; this year, external demand is strong, companies' competitiveness is good, the rate of profitability is high and interest rates have not been this low in Europe for many years,” said a senior Commission official.

Forecasters have also analysed figures published since their autumn economic review, which show that consumer confidence has been rising slowly but steadily since the summer.

Increased confidence, low interest rates and the fact that manufacturers' stocks of goods are running low should all mean that the volume of industrial investment in the Union will grow by 2&percent; this year, says the report.

Commission economic forecasts are taking on an extra importance since member states will be assessed for EMU entry in March 1998 on the basis of their performance this year in reducing their budget deficits and inflation rates.

A detailed statement from the EU's statistical office this week, specifying which accounting operations were allowed to be used to reduce budget deficits, has already been partly taken into account in the forecasters' calculations.

The report looks back over the past five years and questions why growth was so slow, as well as analysing the impact of globalisation on European industry and the trend of manufacturers to substitute capital equipment for labour.

The Commission's economists stress the continuing need for European governments to reduce the amount borrowed in the capital markets by the public sector which, they claim, is crowding out job-generating investment by private industry.

To keep European production globally competitive, they say governments and industry must continue their drive to reduce the amount of output taken up by wages.