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Economic Assessment of the Euro Area: Forecasts and Policy Analysis

Press Release of October 6, 2005

A group of ten of the most respected economic research institutes in Europe have forecast that Euro Area economic growth will experience a modest rate of expansion of 1.2% in 2005, 1.8% in 2006 and 2.0% in 2007. Oil prices have risen by US$20 since April and are expected to remain high at close to US$60 until 2007. EUROFRAME-EFN (European Forecasting Network) has revised down their forecasts by 0.2-0.3 percentage points from six months ago. This revision is limited as the negative impact of the high level of oil prices is substantially offset by the modest depreciation of the euro exchange rate and the drop in long-term interest rates. The Euro Area is still expected to record inflation rates at or close to 2 per cent with the unemployment improving but still in the order of 8.5 per cent over the period 2005-2007.
Interest rates are expected to remain at relatively low levels until 2007 when some modest rises are expected. In the context of moderate growth in the Euro Area, public finance positions are unlikely to show much significant improvement with deficits to GDP at around 23/4 per cent this year and next and 2.4% in 2007. Fiscal policy will however have a dampening effect on economic growth at the Euro Area level over the next two years; Fiscal policy will be slightly contractionary in countries running deficits higher than 3% of GDP, while it will be neutral or slightly expansionary in the other countries.

EUROFRAME-EFN members are: CPB (The Hague), DIW Berlin, ESRI (Dublin), ETLA (Helsinki), IfW (Kiel), NIESR (London), OFCE (Paris), PROMETEIA (Bologna), WIFO (Vienna) with CASE (Warsaw).
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