De Silguy predicts economic upturn despite recent slow-down in growth

Date: 07/03/1996

By Tim Jones

“ALWAYS look on the bright side of life” is a motto which the European Commission seemed determined to live up to as it presented its 1995 annual economic report and tried to assure everyone that the slow-down in growth last year was only temporary.

“It's not a recession, it is basically a crisis of confidence,” said Economics Commissioner Yves-Thibault de Silguy. “There is no reason why we should not have a modest, realistic upturn.”

De Silguy's remarks came as he confirmed that the Commission's economic growth forecast for 1995 had been scaled back to 2.5&percent; from 2.7&percent;, and growth this year was likely to be below 2&percent;.

The Commissioner blamed a reduction in stocks, the impact of the collapse in the value of the US dollar last spring, the delayed effect of a rise in long-term interest rates in 1994 and insufficient reductions in EU budget deficits.

Germany, France and Austria failed to bring their deficits within their target levels for 1995 and only Denmark, Ireland, the Netherlands and Sweden did better than they had envisaged.

The Commission insists, however, that happier days will return because the fundamental conditions of the European economy are at their strongest now since the Sixties.

Outside the EU, the volume of world trade is growing at 9&percent; a year, and the emerging economies of Central and Eastern Europe will continue to demand machine tools and equipment.

Within the Union, inflation is low at 3&percent;, firms' profitability is strong and manufacturing companies can boast margins - the gap between the cost of producing sold goods and total income from sales - at their widest since the late Eighties.

As a result, de Silguy said, “we feel there will be a progressive acceleration of growth later on in the year”.

This will have a dual impact on member states' budget deficits. A resumption in fast economic growth will boost tax revenue and help bring down deficits, while cuts in public spending during the slow-growth period will ensure that recovery, when it comes, will be faster and less prone to inflation.

To back up his case, he quoted the Commission's favourite example of Denmark, where the budget deficit was cut from 9&percent; of national income in 1982 to a surplus of 2&percent; in 1986 while unemployment was halved.

Unlike November, when he was prepared to speculate that eight countries should be ready to join a single currency by 1999, this time the Commissioner was more circumspect in quoting figures. Now he says only that a “considerable number” are likely to make it.