The European Commission has cut its growth forecasts for the euro zone and warned that Europe could face recession if the war in Iraq does not end before the summer. The 2003 Spring Economic Forecasts, published yesterday, predict that the euro zone will grow by just 1 per cent in 2003 and 2.3 per cent next year.
Even if the war ends soon and oil prices remain stable, the Commission believes that about 100,000 jobs will be lost in the euro zone this year.
If the war in Iraq lasts longer than anticipated, the economic outlook could be much worse, it says.
"A worst-case scenario would include a protracted military conflict, high oil prices, a fall in international travel, a decline in foreign direct investment and world trade, and a deterioration of confidence affecting consumption and investment.
In such a case, the euro area and the EU may face stagnation this year and the return to potential growth would be delayed to later in 2004," the report says.
The forecast for growth in Ireland this year has been cut from 4.2 per cent to 3.3 per cent and the Commission expects the Irish economy to grow by just 3.2 per cent in 2004. The report warns that unemployment could rise sharply to 5.5 per cent this year but should stabilise in 2004.
The Commission yesterday adopted Broad Economic Policy Guidelines for the period from 2003 to 2005.
Presenting the guidelines to the European Parliament in Strasbourg yesterday, Economic Affairs Commissioner Mr Pedro Solbes said that running high deficits was not the best way to boost economic growth.
"It is crucial that growth and stability oriented macroeconomic policies in the current uncertain economic environment inspire confidence. Macroeconomic policies must be guided by the need to support growth in the short term, whilst preserving macroeconomic stability.
"For budgetary policies, this means that flexibility must be combined with credible adjustment. Where possible, automatic stabilisers must be allowed to work fully but steady progress must also be made in reducing deficits," he said.
The Broad Economic Policy Guidelines recommend that Ireland should improve public expenditure efficiency, encourage moderate wage deals, prioritise the infrastructural elements of the National Development Plan and raise the level of research and development.
They call for more competition in network industries and "in certain sectors of the economy, such as retail distribution (including the liquor trade), insurance and the professions".
