Strong domestic demand and wage cost increases higher than those in countries whose currencies are closely linked with the deutschmark could lead to an acceleration of inflation in Ireland and Denmark, according to the European Commission. In its annual economic report for 1997, the Commission forecasts that the annual rate of inflation in the European community will decelerate to 2.2 per cent in 1997 and 1998 from 2.6 per cent in 1996. Inflation in Germany and in states whose monetary policies are linked to it is expected to remain around 2 per cent. But Ireland and Denmark are cited as exceptions where strong domestic demand and wage increases are expected to result in annual inflation of over 2.5 per cent. In Britain, Sweden and Finland "continued prudent monetary policies" are expected to result in inflation in a 2.0 to 2.5 per cent range.

In Italy, Spain and Portugal inflation is expected to fall to around 2.75 per cent by 1998, helped by decelerating wage costs. For Greece, the Commission has forecast a rate of 5.75 per cent by 1998, down from 6.9 per cent in 1997.

Economic growth in Europe is now "back on a more favourable track" after set-backs in 1995 and early 1996. Real GDP is expected to increase by 2.3 per cent in the current year from 1.6 per cent in 1996, and by 2.8 per cent in 1998. Faster growth will lead to some improvement in the employment situation but the labour force will also increase. Commission rates for unemployment will from 10.9 per cent to 10.8 per cent this year and faster in 1998 - to 10.4 per cent. But the report warns that a number of obstacles to growth remain. These include insufficient expansion of productive capacity, a distorted economic/ policy-mix and monetary turbulence.

In its report on Ireland the Commission forecasts that growth in gross domestic product will slow to 5.8 per cent this year from 7.8 per cent in 1996 while the unemployment rate will fall to 12 per cent from 12.5 per cent. On Government finances, the report said continued strong economic and revenue growth should lead to a narrowing of the Government deficit to below 1 per cent in 1997 and 1998 while the debt/income ratio should decline by about 4.5 percentage points in both 1997 and 1998.