Inflation is under control in the euro zone and interest rates are low enough to encourage economic growth, according to the European Commission. In a report completed before last week's interest rate cut, the Commission chided France, Germany, Portugal and Italy for not doing enough to cut public debt and called for more economic reforms. From Denis Staunton,in Brussels
Introducing the 2002 European Economic Review, Economic Affairs Commissioner Mr Pedro Solbes, said three years of buoyant growth had given way to a slowdown in 2001.
"There are various explanations for the persistence of the slowdown, but the solution is common: action to strengthen the resilience, internal dynamism and thus the growth potential of the European economy. Macroeconomic stability has to be preserved while the growing delivery gap in the implementation of announced economic reforms needs to be addressed," he said. The report acknowledged that many firms have difficulty raising capital but suggests such problems owe more to the sharp rise in the cost of raising capital on the stock market than to the level of interest rates. "Price stability has firmly been established and incorporated in households' and investors' expectations in the euro area, enabling monetary conditions to be accommodative to domestic activity," it said.
The report said that past mistakes by Germany, France, Italy and Portugal meant these countries were now running budget deficits that endangered the credibility of the Stability and Growth Pact. It said there was a risk that budget positions could get worse in France and Italy if growth did not pick up and called on all four member-states to cut their deficits.
The report warned, however, that only through structural adjustments, especially in the labour market, could underlying weaknesses be addressed. "It should be considered that one-off measures only postpone structural adjustment and do not help in the long run," it said. The report said the EU had taken big strides in reforming its economy but warned it must do more to achieve its goal of becoming the world's most competitive economy by 2010.
It suggested the reforms already undertaken had added almost 0.5 per cent to the EU's annual GDP. "In the absence of the considerable progress that has been made in the field of macroeconomic stability and structural reforms, the euro area would likely be faced with outright recession," it said.
