IMF warns the EU that recovery will take some time

THE International Monetary Fund (IMF) has warned that the recovery in Europe's economy will take longer than expected.

Following talks with European Union finance ministers in Brussels, the IMF says it is having to rethink its earlier bullishness about the strength of the recovery.

The massive sell-off of shares around the world, combined with a slower than expected pickup in demand and the recent rise in the euro, means growth in 2002 will be somewhat weaker than expected.

The straitened circumstances, it goes on to warn, will put additional pressure on EU states to keep their budgets in balance just when a number of them, including France Germany and Italy, are cutting taxes and widening their deficits.

The climbing euro or rather the declining dollar, as it admits was no great surprise, it said, and while it could make exports more expensive, lower prices for imports should help keep inflation under control.

Following the meeting, Europe's finance ministers were keen to back the boost to the euro themselves.

That the European currency is approaching parity (with the US dollar) is for me good news, said French Finance Minister Francis Mer.

Since most energy is priced in dollars, pressure on prices across the EU would ease, he and his colleagues pointed out. But whatever the warm words, the IMF still took pains to warn against breaching Europe's Stability and Growth Pact (SGP), which limits its members to a budget deficit of 3%.

Germany and Portugal have both either come within inches of the limit or breached it, sparking little more than grumbling from their peers.

Hardly surprising, perhaps, since two of them France and Italy are following suit, and Britain has raised concerns about limitations on its ability to borrow for capital investment.

France has already boosted its own budget deficit target 50% to 2.6% since the right wing won parliamentary elections earlier this year, and steep tax cuts are promised as they are in Italy.

The finance ministers meeting has rowed back on the strictures built into the Pact, saying now that the aim is to bring everyone in line by 2004, allowing the maximum wiggle room until then.

The IMF blessed this proposal, saying plans to narrow budget deficits by about half a percentage point a year were difficult but do-able.

But it made sure to warn the EU that it still had to keep working towards keeping the terms of the SGP, particularly when it came to over-eager tax cuts.

As for the performance of the oft-criticised European Central Bank, the IMF said it recognised that less risk of inflation means less of a need to raise interest rates.

With hindsight, it said, the Banks decisions over the three years were appropriate.

It also tried to deflect some of the suspicion about the ECB's inflation target, which solely aims to keep prices rising at less than 2% a year.

That worries some observers, who believe that policymakers can be tempted to squeeze inflation too hard, wiping out growth.