Euro zone growth and inflation should be roughly in line with 2006 this year thanks largely to a positive outlook for leading economy Germany, European Union Monetary Affairs commissioner Joaquin Almunia said today.
The optimistic forecast is the kind of signal driving market expectations that European Central Bank interest rates will be hiked to at least 4 per cent this year, from a current level of 3.5 per cent, to head off future inflation risks.
"We'll end 2007 growing almost as much as in 2006," Mr Almunia told a business conference in Madrid, adding that 2006 GDP euro zone growth should be around 2.6 per cent.
EU Monetary Affairs commissioner Joaquin Almunia
"Our current forecasts indicate that the evolution of prices in the euro zone and European Union in 2007 will be largely the same as in 2006," he added.
Mr Almunia said a three percentage point rise in German value added tax as of January 1st would not affect 2007 growth and inflation to the extent feared a few months ago. "The risk has been overestimated," he said.
Euro zone inflation was unchanged in December from November at 1.9 per cent, in line with the ECB's aim to keep it just below 2 per cent, official data showed today.
Mr Almunia saw leading economies Germany and France cutting public deficits and contributing to a wider correction in euro zone budget imbalances that stoke inflation.
He said he expected Germany's public deficit to fall below 2 per cent of GDP in 2006. He saw Italy pulling its 2007 budget shortfall in line with a target of below 3 per cent of GDP.