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Sunday, 8 April, 2001, 18:37 GMT 19:37 UK
Germany's vulnerable economy
IMF Managing Director, Horst Koehler
The IMF's Horst Koehler wants a cut in interest rates.
By the BBC's Business reporter, Patrick Bartlett in Frankfurt.

After powering ahead last year, the Eurozone economy is seen as the world's best hope of avoiding a global recession, but a combination of factors, from high oil prices to falling stock markets, are taking their toll.

In recent months, business confidence has fallen sharply in most countries, especially in Germany.

Economists are worried that the Eurozone, and Germany in particular, are proving more vulnerable to the American downturn, than their leaders are prepared to admit.

On Monday, Germany's six leading economic institutes are expected to cut their growth forecast for the country to just above 2% this year.

That is in striking contrast to the German government's official prediction of nearer 3%.

European Central Bank (ECB) headquarters in Frankfurt, Germany
ECB are still hoping that the combined effect of lower oil prices, a stronger Euro and tax cuts will help revive the economy

Last week, the IMF's managing director, Horst Koehler, joined others in calling for the European Central Bank to cut interest rates to help European industry cope with the more hostile trading conditions.

But the ECB, which meets on Wednesday, is caught in a dilemma.

Eurozone inflation is well above its target.

The bank fears cutting rates now to give the economy a short-term boost, would cause long-term damage to price stability.

Critics say delaying further risks fatally weakening Europe's resistance to the US contagion.

Rising unemployment

Germany in particular looks vulnerable.

With its dependence on manufacturing exports, it could prove more sensitive than its neighbours to the cold wind from America.

Ominously, since January the decline in German unemployment has stalled, leaving almost four million still out of work.

But not even the pessimists are predicting a recession and Germany, important though it is, is not the entire Eurozone.

Elsewhere, most notably France, the outlook appears distinctly brighter.

Recent retail sales figures suggest consumers, who are enjoying tax cuts in many countries, are still spending hard.

Europe's governments and the ECB are still hoping that the combined effect of lower oil prices, a stronger Euro and tax cuts will all help revive the economy by the second half of the year.

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See also:

29 Mar 01 | Business
Evidence of a European slowdown
21 Mar 01 | Business
German business confidence sinks
01 Apr 01 | Business
Sniffing out an ECB rate cut
04 Apr 01 | Business
Germany's unemployment rises
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