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Wednesday, 22 November, 2000, 12:18 GMT
Eurozone growth to slow
Growth in Germany , the EU's largest economy , is slowing
The economic recovery in the 11 European countries that have joined the single currency is likely to slow next year.

The European Commission is predicting that growth in the eurozone will decline from 3.4% this year to 3.1% in 2001.

But, according to the Commission, "growth is expected to remain at the high level in 2002 and not to drop below 3%".

It says that is the best economic situation for a decade, and is "based on both solid domestic fundamentals and a postiive contribution coming from rising world demand."

The EC's prediction is in line with forecasts by the OECD published on Monday.

The main reason for the slowdown is higher inflation, which is likely to push the European Central Bank into raising interest rates further.

"The slowdown from the high growth rate ... is mainly due to the abrupt hike in oil prices," the EU report said. "This is also the reason why average inflation in the euro area will be above 2% this year and next."

Inflation in the eurozone has been rising as higher oil prices feed through to the economy, and it is now forecast to reach 2.2% this year and 2.7% next year.

That is above the ECB's target of 2%, and could persuade the central bank to raise rates above the current level of 4.75%.

Another uncertain factor is the level of the euro, which has fallen by 30% against the US dollar since its launch in 1999. The ECB and EU finance ministers believe that the euro is undervalued - but any substantial rise in its value could hurt the eurozone's export industries, while continued devaluation would drive up inflation in the region.

Structural reforms

The OECD forecasts that the ECB will raise interest rates by 0.5% next year.

But the key question is whether the pace of structural reform in Europe will continue, and whether that will lead to further gains in productivity similar to those enjoyed by the US economy.

"The strength of the supply side of the US economy has been revised up in recent years, and the question now arises whether it is now the euro area's turn to deliver positive surprises in this area," the OECD said.

It warned that if unions try to raise wages to compensate for higher inflation, that could wipe out any productivity gains and lead to even lower growth in the future.

Higher than UK

But growth in the eurozone is likely to be higher than that in the UK over the next two years.

Both the EU and the OECD predict that growth in the UK will slow to below 3% next year, and come in at around 2.6% in 2001 and 2.3% in 2002.

That could lead to lower interest rates, but the slowdown means the UK economic cycle will still be out of line with that of the eurozone.

That would make it less likely for the UK government to recommend early membership of the euro - as its main criterion is the convergence with the eurozone.

The 11 countries in the eurozone are France, Germany, Italy, Spain, the Netherlands, Austria, Belgium, Finland, Luxembourg, Ireland and Portugal. Greece will join the single currency in January 2001.

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31 Aug 00 | Business
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