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Euro-zone finance ministers debate inflation, economy as growth slows
(Associated Press WorldStream Via Acquire Media NewsEdge) BRUSSELS, Belgium_Finance ministers of the 15-nation eurozone debated inflation Tuesday at a time when prices across Western Europe are rising fast, growth is slowing and the United States _ Europe's biggest trade partner _ teeters on the brink of recession.
The finance ministers were meeting with Jean-Claude Trichet, the head of the European Central Bank, who has kept his bank interest rate steady at 4 percent in contrast to the U.S. Federal Reserve which has been cutting interest rates to shore up consumer confidence and economic growth.
Interest rate cuts stimulate the economy _ but can fuel inflation as they encourage consumer spending by lowering the cost of borrowing money.
On April 28, the European Commission reported Europe, unlike the U.S., was still far from a recession but noted that global trade was slowing markedly and that the U.S. on the brink of a recession.
It warned of a possible inflation spiral and cut its growth forecast for the euro-zone to 1.7 percent this year _ down from an earlier forecast of 1.8 percent and well below growth of 2.6 percent in 2007. It predicted inflation would surge to an average of 3.2 percent this year, up from 2.1 percent last year and far above the ECB's recommended level of just under 2 percent.
At the outset of the eurozone meeting, Belgian Finance Minister Didier Reynders and others called on Trichet to pursue a "a balanced policy mix."
For Trichet inflation is one of Europe's biggest worries, sapping household spending as oil prices race to new highs and food prices soar on higher world demand.
Many economists expect the ECB to cut the interest rate in the second half of this year to 3.5 percent, possibly in September.
Record high prices for food, oil and metal prices worsen the inflation outlook at a time when Europe is already reeling from a weak U.S. dollar and financial markets turmoil. The weak dollar makes European exports expensive.
Slowing growth is causing concern of a weakening resolve in France, Italy and Portugal to stick to their balanced budget commitments by 2010.
The European Commission expects France's budget gap to hit 2.9 percent this year and 3 percent _ the limit under euro rules _ next year. Italy's budget gap is set to rise from 2.3 percent this year to 2.4 percent in 2009 while that of Portugal may surge from 2.2 percent in 2008 to 2.6 percent in 2009, according to EU data.
The finance ministers were also to discuss the impact of wage increases. These have been moderate in the eurozone in the past decade and contributed to job creation. The European Commission has urged EU governments to avoid large wage hikes saying these would only trigger a price spiral and put severe pressure on the poorest and most vulnerable members of society.
Copyright ? 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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