The euro zone's economic growth prospects remain strong although expansion should ease in 2007 from this year, a European Commission report said.
The commission's quarterly report published today said in the 12 countries using the euro, domestic demand fuelled growth that was expected to increase to 2.6 per cent in 2006, its highest level in six years. The forecast was in line with a previous estimate.
The European Union's executive also said expansion in 2007 is likely to slow to around its potential level.
That was also in line with a November forecast of growth next year of 2.1 per cent. In 2005, euro zone growth was 1.3 per cent.
"Growth prospects remain robust. Growth is being driven primarily by domestic demand, suggesting the expansion has become self-sustained," the report said.
"Looking further ahead, some deceleration in growth is expected for 2007, reflecting the temporary effects of the VAT increase in Germany, the recent depreciation of the dollar and an easing in global demand, mainly from the US."
The recent weakening of the dollar against the euro is unlikely to hit European exporters much and should contribute to an orderly reduction in global economic imbalances, such as a giant US current account deficit, the report said.
European Central Bank President Jean-Claude Trichet was quoted as saying today that euro zone interest rates remain accommodative despite a series of increases.
"It is the feeling of the ECB governing council that our monetary policy remains accommodative," Mr Trichet told a Greek newspaper. "Additionally, we are seeing that medium- and long-term market rates are favourable for growth," he said.
Mr Trichet said this was due to the fact that the ECB had managed to keep inflationary expectations anchored at low and stable levels.
"Interest rates on 50-year paper are now at 3.86 per cent, embodying market expectations that we will maintain prices stable in the next 50 years," Mr Trichet was quoted as saying.
"Our primary mandate is to ensure price stability. The consistency we are showing on this mandate allows these favourable long-term rates."