Economic sentiment set for boost

EU STABILITY and growth pact reforms, a cut in interest rates and falling German inflation are set to combine to provide an uplift to economic sentiment in the coming weeks.

Inflation in Germany fell unexpectedly in November, according to preliminary figures released yesterday, giving the European Central Bank (ECB) plenty of latitude to ease interest rates next week.

Preliminary consumer price data from the six key German states indicates inflation has dropped by 0.4% in November from last month, leaving the annual rate at 1.1%, down from 1.3% in October against a background of forecasts of a rise in inflation rates.

Signals emanating from the EU Commission suggest Monetary Commissioner Pedro Solbes' budget to be announced tomorrow includes changes, if not to the rules, at least to the guidelines of the stability and growth pact.

The Financial Times yesterday was the first to indicate Commissioner Solbes may be about to implement changes to the controversial pact, which just weeks ago was branded as “stupid” by EU Commission president Romano Prodi. The FT said the Solbes move will also help reduce obstacles to Britain adopting the euro.

“Pedro Solbes, EU monetary affairs commissioner, tomorrow will set out proposals to make the pact more growth-orientated, while cracking down harder on countries with poor public finances,” the FT’s George Parker said.

Then later yesterday commission sources down-played the possibility of rule changes to the stability and growth pact who says that no eurozone state can have a budget deficit of more than 3% of GDP.

“We don't propose new rules,” the source told Reuters, adding that the plan to be unveiled tomorrow would comprise only guidelines. The source repeated past European Commission statements that the guidelines would cover debt reduction in states still saddled with high debt levels like Germany and Portugal. However, he said the proposal would not spell out exactly how they should do this.

“How is a national issue,” he said.

The source added that Solbes’ initiative would say what would be considered as a sufficient reduction in specific instances. He said some elements of the changes would be referred to European Union finance ministers, then to EU heads of state and that the overall proposal was not going to be immediately applied to any given member state.

The source said the initiative would not suggest any changes to the measures used to assess whether national budgets were compliant with the rules of the stability pact.

“It does not change any calculation,” he said, adding that the 3% deficit limit would still be assessed using the nominal deficit.

Meanwhile, Irish industrial production was 13.2% higher in September on a seasonally adjusted basis than in the same month last year, provisional data from the Central Statistics Office published yesterday indicates.

Production increases of 20.9% and 6.1% were recorded for intermediate goods and consumer goods respectively.