Europe's economy will grow more slowly than expected this year but will escape the worst effects of the US downturn, the European Commission said yesterday. The Commission has revised downwards its growth forecast for the euro zone to 2.8 per cent this year and 2.9 per cent in 2002.

The Commission's forecast is more optimistic than that of the International Monetary Fund (IMF), which expects the euro-zone economy to grow by just 2.4 per cent this year. Unlike the IMF, the Commission held back from asking the European Central Bank (ECB) to cut interest rates as a boost to growth when its Governing Council meets today.

EU Economics Commissioner, Mr Pedro Solbes, acknowledged that the Commission's optimism is based on the expectation that the US downturn will be "V-shaped", with a recovery in the second half of this year. The Commission expects the US economy to grow by 1.6 per cent this year and by 3 per cent in 2002.

"The effect of the slowdown has not been that major but it varies from country to country. Germany and Ireland are the countries that have been most affected by the slowdown," Mr Solbes said.

Germany, which accounts for one third of the euro zone's GDP, is expected to be among the EU's worst performers, with a growth rate of just 2.2 per cent this year. And the Commission warned Berlin that it must rein-in spending to ensure that its government deficit does not exceed 1.5 per cent in 2001.

Commission economists blame inadequate structural reforms and the continuing, massive cost of national re-unification for Germany's poor performance. Transfers from west to east continue to strain Berlin's budget but over-investment in construction during the early 1990s has also damaged the economy.

Apart from diverting investment away from more profitable sectors, the ill-advised construction boom has left a legacy of thousands of unemployed building workers.

Italy is expected to perform more successfully than Germany but the Commission is concerned about Rome's budget deficit and public debt. The Broad Economic Policy Guidelines urge Italy to match any loss of revenue from new tax cuts with reduced public spending.

The conservative politician, Mr Silvio Berlusconi, who is expected to become Italy's prime minister next month, has promised to introduce an expansionary budget regardless of what the Commission says.

This year's Broad Economic Policy Guidelines are more specific in their recommendations than has previously been the case. Mr Solbes said they aimed to preserve non-inflationary growth, encourage structural reform and tackle the challenge of Europe's ageing population.

The Commission's forecasts offer little cheer to US policymakers who hope that Europe will become an engine of world economic growth and help the US out of its slowdown. The Commission predicts that the EU economy will grow more slowly than the US next year and more slowly than the world economy this year and in 2002.

The ECB is expected to ignore calls for a cut in interest rates when its Governing Council meets in Frankfurt today.