European recovery boosted by US tax cuts deal

AP News
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Posted: Mar 01, 2011 7:43 AM
European recovery boosted by US tax cuts deal

The recently agreed tax cuts in the U.S. will help Europe's economic recovery pick up some steam this year despite rising energy costs and debt troubles in a number of countries that use the euro, the EU's executive said Tuesday.

However, inflation is also on the rise amid sky-high oil prices due to the turmoil sweeping across the Middle East and North Africa, the European Commission warned.

In the latest projections, economic growth in 2011 is expected to be somewhat stronger than anticipated last autumn as Europe's larger exporting nations enjoy better demand from the U.S. _ at the end of last year, the Obama administration and Republicans in Congress agreed to extend Bush-era tax cuts and unemployment benefits.

"Global growth in 2011 is being revised up, mainly on the back of the additional fiscal stimulus adopted in the U.S. in December," the Commission said. "The improved environment for the external environment will provide a boost to EU exports, particularly in the more export-oriented economies."

But while countries like Germany are enjoying the fruits of an improved global economy, others like Spain continue to lag behind as their governments enact harsh austerity measures, such as higher taxes and spending cuts, in an attempt to get a handle on their perilous debt situation.

For the 17-country eurozone, the Commission is forecasting growth of 1.6 percent this year, 0.1 percentage point higher than previously thought. The Commission raised its 2011 forecast for the wider 27-nation EU, which includes non-euro members such as Britain and Poland, by 0.1 percentage point to 1.8 percent.

The eurozone's recovery from recession has also shown signs of helping the labor market. Eurostat, the EU's statistics office, reported Tuesday that unemployment in the eurozone fell to 9.9 percent in January. That's the first time the rate has been below 10 percent since last March.

But while unemployment is showing tentative signs of falling, inflation is on the rise. Eurostat said consumer prices rose 2.4 percent in the year to February, 0.1 percentage point higher than the previous month.

The figure may have been in line with market expectations but inflation is running at its highest level since November 2008 and remains above the European Central Bank's target of keeping price increases "close to but below" 2 percent.

Though the rise in inflation is unlikely to prompt the ECB to raise its main interest rate from the current record low of 1 percent when it completes its monthly policy meeting on Thursday, a number of rate-setters are getting jittery and the markets are now pricing in the probability of higher borrowing costs towards the end of this year.

The Commission revised its inflation projections up markedly following the recent surge in energy and commodity prices. It now expects inflation in the eurozone in 2011 to be 2.2 percent, instead of 1.8 percent previously.

The Commission noted that the economic slack left over by the deepest recession since World War II, subdued wage growth and well-anchored inflation expectations will keep underlying price pressures in check.

However, much will hinge on developments in the Middle East and North Africa after uprisings in Tunisia and Egypt brought down longtime leaders and unrest in Libya threatens to end the regime of Moammar Gadhafi.

"Should geopolitical tensions spread further in the region, disruptions to oil supply could not be excluded, fueling oil-price increases beyond what is assumed in this forecast," the Commission said.

In its forecasts for 2011, the Commission is predicting average oil prices of just over $100 a barrel, up from around $80 a barrel in 2010. At the moment, Brent crude in London is trading at a little over $112 a barrel while the New York equivalent, having breached $100 last week, is back down around the $97 mark.

Olli Rehn, Europe's commissioner for monetary affairs, sought to downplay the impact of higher oil prices on the economic recovery, noting that the increases witnessed so far are not hugely damaging.

"Yes, it has an impact, but with these oil prices ... it is still relatively low in Europe," Rehn said in a press briefing following the publication of the Commission forecasts.

However, if oil prices rise to $200 a barrel, which many analysts think is possible if Saudi Arabia becomes embroiled in the crisis sweeping the Arab World, then the global economy could come to a standstill or fall back into recession.

Rehn noted that a 10 percent increase in the oil price knocks off around 0.1 percentage point off growth in Europe.

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Gabriele Steinhauser in Brussels contributed to this story.