The Commission has played down expectations for the EU’s economy in 2008 and 2009. Meanwhile, the European Central Bank has responded to the “continued uncertainty” on European financial markets following the US sub-prime mortgage crisis by announcing further cash injections, but said higher than expected inflation meant a cut in interest rates remained out of the question.
European economies are unlikely to perform as well as had been predicted six months ago (EURACTIV 8/05/07), due to the “summer’s turbulence in the financial markets, the US slowdown and the ever-rising oil prices”, but overall “the negative impact should be limited”, said Economic Affairs Commissioner Joaquín Almunia, presenting the Commission’s latest economic forecasts on 9 November.
The autumn report foresees that growth in the EU economy will reach 2.4% in 2008 and 2009 – 0.3% less than had been predicted in the spring. In what appeared a sign of recognition that the global credit crunch resulting from the US sub-prime mortgage crisis was not yet over, the ECB’s governing council, on 8 November, announced that it would repeat emergency liquidity injections worth €40 billion and €75 billion on 23 November and 12 December respectively.
ECB President Jean-Claude Trichet was also singularly expressive regarding the euro’s climb to ever higher record levels against the dollar. Last week, the currency hit a new high, slightly above $1.47, leading Trichet to warn that “brutal moves were never welcome”.
Nevertheless, despite all these downward risks to economic growth, the ECB held interest rates unchanged for the fifth straight month, saying that “upside risks” to price stability had been “fully confirmed”, with inflation jumping to 2.6% in October due to rising prices for food and oil. He nevertheless expressed optimism that the spike would be “transitory”.
The European Trade Union Confederation (ETUC) however insisted that the ECB should cut interest rates “right now”. “Growth dynamics are already weakening and are not strong enough to withstand the triple shock to aggregate demand that is in the pipeline for the coming quarters,” it stated. “If the ECB does not put itself at the front of the economic curve, it risks entrenching negative growth expectations and repeating the dismal growth performance of the first half of this decade.”
In its own Economic Outlook for the EU, employers’ group BusinessEurope noted that, while it endorsed the ECB’s monetary policy, it feared that the Bank was not giving “sufficient weight to exchange-rate developments and downside risks to growth”, while on the other hand, it believed that inflationary pressures “appear contained”. “Upside risks to medium-term price stability are largely offset by downside risks to growth. In this context, no further tightening of monetary conditions seems warranted in the near future,” it stated.