Finance chiefs expect lower growth and higher inflation in euro zone

EURO-ZONE ECONOMIES face lower than expected growth and higher inflation in 2008 as the financial market crisis spills over into the wider economy. But EU finance chiefs insisted yesterday that countries using the euro would not follow the US into a possible recession.

Chairman of the euro group Jean-Claude Juncker said the resilience of the euro zone had proved remarkable but he said its 2008 growth forecasts would be below previous predictions. The biggest immediate concern was the "incredible increase in inflation", which had been caused by rising oil, food and commodity prices and by governments not paying attention to growing inflationary pressures in their home states.

"Inflation will remain at too high a level this year and not in line with price stability," said Mr Juncker, who urged governments to implement wage restraint and avoid unnecessary increases in indirect taxation in an effort to tackle rapidly rising prices.

Euro-zone inflation in March reached 3.5 per cent, its highest rate since the euro currency was founded a decade ago. The European Commission predicted in February that inflation would average 2.6 per cent in the euro zone during 2008 but it is now expected to revise these figures upwards.

As thousands of trade union members in Slovenia prepare to march today in protest at rising prices and the continuing calls for "wage restraint", European Central Bank (ECB) president Jean-Claude Trichet said price stability was essential for the poorest and most vulnerable EU citizens.

He also warned governments against attempting to buy their way out of inflationary pressures by agreeing to higher wages.

"If we simply wipe away this tax from the outside, we effectively weaken the economy," said Mr Trichet, who added that the oil-price shocks in the 1970s had proved that this led to unemployment.

Mr Juncker noted that inflation affected the poorest members of society. "Multimillionaires can deal with food price rises with no trouble at all. Those living on €300, €400, €500, €600, €700 can't live with runaway inflation."

Earlier this week a report from the International Monetary Fund (IMF) lowered its growth forecast for the euro area to 1.3 per cent from 1.6 per cent as a result of the financial market turbulence. Mr Juncker said the report was a "less than exact observation of European reality" and he predicted that growth in the euro zone would be higher than the IMF projection.

Other finance ministers reiterated the concern with inflation rather than growth. Austrian finance minister Wilhelm Molterer said euro-zone growth in the first quarter was better than expected and the fundamental situation was stable and robust.

The joint message by finance ministers suggests that politicians are uniting behind the ECB's policy to keep inflation in check.

The ECB's inflation fight has seen it keep rates on hold since June 2007 in the face of criticism from some ministers that monetary policy was too restrictive and hurting growth.

The ECB is set to meet next week and is expected to keep interest rates on hold.