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Monday, 18 June, 2001, 18:16 GMT 19:16 UK
Eurozone inflation soars
President of the European Central Bank, Wim Duisenberg
Rising inflation is a key concern for Wim Duisenberg
Europe's economy has been dealt a double whammy, with inflation rising to an eight year high, and a financial chief warning that Germany may fall into recession.

Inflation in the 12 countries which have adopted the euro rose to 3.4% in May, the highest level since 1993, and half a point above April's figure.

The figure represented the first time that eurozone inflation has broken the 3% level since the launch of the European single currency in January 1999.

The news, at face value, would render the European Central Bank unlikely to cut interest rates further, for fear of only worsening the inflation outlook.

Dangerous cocktail

But the ECB, which aims to keep inflation below 2.0%, is also facing concerns that Europe is being ever more seriously affected by the global economic slowdown.

Eurozone inflation
2.9% Austria
3.1% Belgium
3.3% Finland
2.5% France
3.6% Germany
3.9% Greece
4.1% Ireland
2.9% Italy
3.8% Luxembourg
5.4% Netherlands
4.9% Portugal
4.2% Spain
The bank last week cut its eurozone economic growth forecast for this year to 2.2-2.8%, from an earlier estimate of 2.6-3.6%.

And Hans Reckers, a member of the Bundesbank, Germany's central bank, heightened fears over growth by warning over a gloomy economic cocktail of high inflation, rising unemployment and weak consumption.

"In Germany there is a dangerous negative combination of economic developments so that a recession cannot be excluded," Mr Reckers said.

His comments followed a decision by two institutes to reduce their forecasts for growth in the German economy, the eurozone's largest, to less than 2% this year.

But Stefan Bielmeier, economist at Deutsche Bank in Frankfurt, said that Germany, as a leading export, was well placed to benefit from an improvement in economic conditions.

"We expect the US to recover in the second half and that should have a very rapid impact on Germany," he said.

Inflation peaked?

Jonathan Prendergast, strategist at Credit Suisse First Boston in London, said the mixture of high inflation and lower growth was "quite a concern", and posed a dilemma for the ECB.

"While there is good reason on the economic growth side for lower interest rates, the way things are biased, the inflation numbers are complicating that decision."

The European Commission, however, took comfort in the May's 3.4% inflation figure was largely due to rises in energy prices.

And eurozone inflation is widely forecast to fall in recent months as the impact of mad cow disease and foot-and-mouth works it way out of the data.

"Inflation should now have peaked," Deutsche Bank's Stefan Bielmeier said.

"The turnaround itself should be enough for the ECB to cut rates in light of the economic downturn."

Relative rates

Among eurozone states, inflation was highest in May in the Netherlands, with Portugal and Spain close behind.

France and Italy brought up the bottom of the list.

Average inflation across all 15 EU member states, including the UK, was at 3.1%.

The UK has the lowest rate of inflation rate of all 15 nations, at 1.7%.

That is lower than the UK's official inflation rate of 2.4%, because the EU's HIPC index of inflation excludes housing costs.

At 1800 GMT, the euro stood at $8596 on forergn currency markets, half a cent below its high for the day.

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See also:

12 Jun 01 | Business
UK inflation hits two-year high
25 May 01 | Vote2001
Q&A: Britain and the ECB
11 May 01 | Business
ECB rate cut criticism
07 Jun 01 | Business
Eurozone rates left on hold
20 Apr 01 | Business
EU debates economic slowdown
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