ECB paints rosy picture for euro zone

The euro zone will enjoy steady economic growth and slightly lower inflation over the next two years, the European Central Bank (ECB) predicted last night.

In the first economic forecasts the ECB has published since the euro's inception, the bank said it expected growth to average 2.6 to 3.6 per cent next year and 2.5 to 3.5 per cent in 2002.

Euro-zone inflation would come down from its present level of 2.9 per cent to 1.8 to 2.8 per cent next year and 1.3 to 2.5 per cent in 2002, the ECB said.

The projections are based on the assumption that the euro will enjoy a stable exchange rate against the dollar and that oil prices will fall.

The ECB president, Mr Wim Duisenberg, stressed recently that economic projections represented only one indicator among several that would be used to determine the bank's monetary policy. Economists last night interpreted the prediction of strong growth as a sign that the ECB was not planning to cut interest rates in the near future.

The ECB's upbeat assessment of the strength of the euro-zone economy contrasted sharply with the pessimistic tone of the latest report from the Ifo Institute, one of Germany's leading economic think tanks.

The institute revised downwards its forecast of next year's economic growth in Germany, Europe's biggest economy, by almost half a percentage point.

The institute's chief economist, Mr Willi Leibfritz, said in Munich yesterday that the source of the report's pessimism lay in signs of weaker growth in world trade.

The institute warned the ECB not to increase interest rates in response to higher oil prices, which it identified as a temporary phenomenon that would be reversed next year.

Mr Leibfritz said it would be a mistake for the ECB to lower interest rates too soon, even if the US Federal Reserve Board took such a step - a move widely expected by the markets.

Dr Jorg Kramer, chief economist at Invesco Asset Management in Frankfurt, warned yesterday that the succession of interest rate rises introduced by the ECB since autumn last year would shave about 0.7 percentage points off euro zone growth.

Dr Kramer predicted that the significant rise in oil prices earlier this year, combined with the interest rate rises, would reduce the spending power of European consumers and businesses.

Other experts, however, believe the euro may have finally turned the corner on the foreign exchange markets and some predict that the European currency will reach parity with the dollar during the course of next year.

Mr Thomas Straubhaar, president of the Hamburg World Economy Archive, maintained that Europe would reap greater benefits from the new economy than the US and that the introduction of euro notes and coins and the planned EU enlargement to the east would further boost growth.

"The financial markets are slowly starting to honour the fact that during the past few years, Europe has enjoyed greater monetary stability than the US," he said. "We are at the start of a European decade."