The European Commission has predicted that economic growth in the euro zone this year will be even weaker than expected, with the euro's rise against other currencies hitting exports, writes Denis Staunton in Brussels.

However, the Commission's quarterly report on the euro zone suggests that, despite its impact on exports, the euro's rise is in line with economic fundamentals and is essentially good for the European economy.

The Economic and Monetary Affairs Commissioner, Mr Pedro Solbes, said a stronger euro would help to keep inflation low and would ultimately benefit economic growth. "Overall, the appreciation of the euro will be beneficial to growth in the euro area. Recent developments mark a return of the euro to a level in line with economic fundamentals and price competitiveness remains close to its long-term average," he said in his introduction to yesterday's report.

Mr Klaus Regling, director-general of the Commission's Economic and Monetary Affairs directorate, said there had been virtually no growth in the first half of 2003 and that the recovery later this year would be weak.

"It is likely that cumulative growth this year will be slightly weaker than expected earlier. The 1 per cent growth we predicted in April looks a bit on the high side," he said.

The report predicts that, with tax revenues falling and social security bills rising, most euro-zone governments will miss their budget targets this year. It suggests that Ireland will be one of only four euro-zone countries to meet or improve on its budget targets.

Mr Solbes said that slow growth and falling inflation had fuelled fears of deflation in parts of the euro zone but he suggested that such fears were exaggerated.

"An analysis of inflation trends suggests that while the risks of deflation may have increased, they are still minor in the euro area.

"Headline inflation remains at 2 per cent and neither monetary indicators nor wage developments provide convincing evidence of strong deflationary pressures in the euro area," he said.

Italy's prime minister, Mr Silvio Berlusconi, said yesterday that he would use his country's six-month EU presidency to boost growth by promoting investment in pan-European transport and energy projects.

"The first priority is the need for greater support in the economy through an increase in public and private investment with the co-operation of the European financial institutions, above all the European Investment Bank," he said.