Mixed signals for Europe's economic outlook

Europe will have to get used to high oil prices and keep a sharp eye on inflation, EU Economic and Monetary Affairs Commissioner Joaquin Almunia has warned.

“There is no room for complacency in the domain of fighting against inflationary pressures,” he said after a meeting with euro zone ministers in Luxembourg.

His words echoed the European Central Bank last week which kept interest rates steady at 2%, stressing the need for “strong vigilance” on higher prices.

Almunia delivered a mixed report on Europe’s slow economic recovery yesterday, saying the European Commission expected stronger growth in the second half of the year. Economic sentiment is rising, investor confidence is improving but consumers are still reluctant to spend.

The jump in inflation from 2.2% to 2.5% in September suggested that oil prices are having an impact, he said.

However, Europe has so far escaped the second round impact of higher energy costs, mainly wage increases.

He said high oil prices meant governments should restrict handouts to soften the blow of fuel costs to people on low incomes.

So far Poland and Hungary have ignored EU warnings that fuel tax cuts could distort the market.

Malta, Estonia, France and Latvia have also blazed ahead with aid to specific business sectors such as farmers and fishermen.

Almunia also warned Germany, Luxembourg and Italy on their budget deficits for 2005, saying they fell short of targets set a year ago.

Germany, Europe’s largest economy, is set to report a 3.7% deficit this year, breaking the EU limit for the fourth year running.

German Finance Minister Hans Eichel, who is likely to step down as a new government forms in Berlin, greeted reporters with a final defence of his budget policy.

He said Germany would have to undergo an “economic crash course” to bring the deficit under 3% in 2006. “In my view, the absolute latest deadline is 2007 and that will require major efforts,” he said.

Eichel refused to say if he had won a new job in the new line-up headed by Germany’s first female chancellor, Angela Merkel.

Today, all 25 EU finance ministers will gather to discuss Hungary’s budget deficit, aid to the Middle East peace process and reform of the European financial services system.

Budapest faces a formal warning for breaching the 3% of gross domestic product limit set by European Union rules.

Hungary’s central bank warned last month that its deficit might reach 7% of GDP – well over its 4.7% target for 2005 – risking government plans for Hungary to adopt the euro currency by 2010.

Last year, Hungary was given until 2008 to bring its deficit in line with EU rules. It cannot be fined because it does not follow the same rules as euro members.

A question mark hangs over how Hungary calculates the deficit, with the EU statistics agency Eurostat insisting that the government include the cost of building a new highway.

Almunia is due to tell ministers about the results of discussions on Hungary’s financial statistics.

At the EU finance ministers meeting today, they will also discuss achieving better co-operation with US regulation and the ongoing reform of the European financial services system.

EU Competition Commissioner Neelie Kroes will brief them on the initial results of her sweeping antitrust inquiries into retail banking, business insurance and energy sectors.

They will also hear how they can help fund the Middle East peace process. European Investment Bank President Philippe Maystadt is expected to give details about a possible contribution from the EU’s lending institution.