European economy turns the corner

German Finance Minister Eichel is under pressure to perform

The European economy is starting to recover, powered by returning confidence and surging trade, the EU has said.

According to the European Commission's spring economic forecasts, growth should start to accelerate in the second half of this year.

"Private consumption holds the key for the recovery gaining momentum," the Commission said, arguing that much spending will have been postponed in the wake of 11 September.

In the meantime, the Commission warned that unemployment - the EU's main economic problem - could rise.

Ups and downs

Overall, the Commission now expects eurozone gross domestic product (GDP) growth to slow to 1.4% this year, less than half the average seen in the second half of the 1990s.

But growth should more than double to 2.9% in 2003.

This forecast is largely based on current predictions that global trade should grow by 7% in 2003, a far stronger performance than seemed likely late last year.

The combination of robust consumer spending and lively global trade will have the disadvantage of blocking progress in fighting inflation.

Eurozone inflation, although far from high at 2.2% annually, is the main factor behind Europe's relatively high interest rates.

The German question

The trickiest economic problem remains Germany, which has slipped to the bottom of the European growth league.

Unemployment has risen beyond the 4 million mark, contributing to a Europe-wide surge in joblessness.

The Commission now predicts that eurozone average unemployment will rise to 8.5% this year, before settling back towards 8.1% in 2003.

High unemployment, which is almost twice as severe in Europe as in the UK and United States, is the key issue in a number of pending election battles around the continent, including Germany and France.

Budget battles

The other key issue facing Germany is the need to moderate its state spending, which came close to earning it a rebuke from the EU earlier this year.

The Commission forecasts Germany to remain just within the target level on spending, keeping its budget deficit within 3% of GDP.

The Commission assumes no shift in policy, although this could be tested with the country facing elections later this year.

Lack of confidence in Brussels' ability to keep country budgets in line has undermined the stability of the euro over the past few months.