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EU: IMF Foresees Reduction In Economic Growth

The IMF this month is likely to join a growing number of governments and institutions that are reducing expectations for economic growth in the European Union's 12-nation euro-zone. IMF head Horst Koehler this week signaled a reduction is forthcoming in a fund report to be issued later this month. Prospects for lower growth will increase pressure on politicians and bankers to take measures to stimulate the economy, but it also punctures a popular belief that Europe was somehow immune to the economic slowdown in the United States and Asia. RFE/RL correspondent Mark Baker has the story.

Prague, 4 April 2001 (RFE/RL) -- The International Monetary Fund looks set to lower its economic growth forecast this year for euro-zone countries in a report to be released later this month.

The head of the IMF, Horst Koehler, this week signaled a reduction to 2.5 percent growth for the 12-nation euro-zone -- from an earlier projection of 3.5 percent -- in an address to the German parliament. He said the forecast reduction was "likely."

An IMF spokeswoman in Washington told RFE/RL she could not confirm the cut but acknowledged that Koehler, as the IMF's managing director, is authorized to make such comments. She said the full forecast for 2001 will be published in the IMF's "World Economic Outlook" due out 26 April.

The euro-zone economies grew 3.5 percent as a group in 2000 and economists had expected similar robust growth this year. But a rapid slowdown in the U.S. economy at the end of last year and continuing bad news from Japan, the world's second-biggest economy, have forced governments, banks, and research institutes to cut their forecasts for Europe.

Stefan Schneider of Deutsche Bank Research in Germany says his bank reduced its own forecast several weeks ago. He tells RFE/RL the reasons are as follows:

"The deceleration of the U.S. economy, the disappointing news from Japan, which is now at the brink of recession again, and the overall impact of the lower world economy prompted us to lower our overall GDP (gross domestic product) forecast. [The] external stimulus that gave a major boost to growth in euro-land last year will be much lower [this year]."

He says EU economies have benefited from a high demand for their exports. This in turn stimulated large amounts of foreign investment in the EU. As the world economy slows, he says this external stimulus will not be there this year.

Aside from putting pressure on politicians to stimulate growth, the lower forecasts serve to puncture the belief, popular earlier this year, that the EU would escape the economic slowdown in the United States and much of the rest of the world.

EU leaders argued earlier this year that since direct trade with the United States is a relatively small component of their economies, the slowing U.S. economy would not have much of an impact. Officials are now conceding that economic interdependence is greater than was thought.

Schneider says this is the second time in two years that EU leaders erred by downplaying the effects of external factors:

"I think we have learned for the second time that Europe is not immune to what is happening elsewhere. The first time was in 1999-2000 when the ECB [The EU's European Central Bank] was telling us that the weak euro would not have an impact on inflation -- and we learned [later] that it actually had. And now it is the same politicians and central bank telling us for quite some time that given the low direct trade exposure, the slowdown in the U.S. won't have such a dramatic impact on euro-land. But I think it's not sufficient."

The lower growth forecasts also increase pressure on the European Central Bank to reduce interest rates to stimulate economic growth.

The ECB meets next on 11 April to consider changing the euro-zone benchmark rate from the current 4.75 percent.

The ECB has left rates unchanged since October, after raising them six times last year in an effort to damp inflation worries brought about mainly by higher oil prices. It's the only major central bank in the world not to have reduced rates this year.

By contrast, the Federal Reserve, the U.S. central bank, has lowered its benchmark interest rate by 1.5 percentage points since January in an effort to boost the economy. The main U.S. rate, the fed funds rate, now stands at 5 percent.

Schneider says that because of the effect external factors have had on EU economies, a rate reduction is inevitable. He says he wouldn't be surprised to see a reduction as soon as next week.

"For us it's just a matter of time [as to] when the ECB will cut rates. And actually we think there's a good chance [it will happen] next week -- on 11 April -- when the bank will have its next meeting."

Koehler put extra pressure on Europe's central bankers in his address this week by saying the IMF would support a reduction in rates. He said lower interest rates would "undoubtedly" help the European economies. The remark was surprising since in the past the IMF has refrained from differing with the ECB in public on interest rate policy.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.