Brussels, Nov. 13 (Bloomberg) -- Europe's economy will expand at the slowest pace in nine years in 2002, the European Commission said, adding to pressure on the region's central bank to lower interest rates. The commission, the European Union's executive arm, cut its growth forecast for the 12 nations sharing the euro to 0.8 percent this year and 1.8 percent next. German Chancellor Gerhard Schroeder has the ``wrong remedies'' to spur growth, which will be slower than the region's average, a panel of his advisers said.
Germany, France and Italy, restrained by EU budget goals, can't lower taxes or boost spending to promote growth without risking breaches of deficit limits designed to protect the euro. The EU today urged all three to take steps to cut their deficits. ``Governments are pinned against the wall,'' said Eva Vorbauer, who helps manage 10 billion euros ($10 billion) at HSBC Trinkaus Capital Management in Duesseldorf. ``The European Central Bank has some room to cut -- such a move would, at least, help sentiment. The economic and fiscal situation looks very grim.''
Last week the bank left its benchmark rate unchanged at 3.25 percent. ECB President Wim Duisenberg said the bank's ruling council had ``discussed extensively'' whether to change rates.
Policy Makers Shifting
Support among policy makers for a cut appears to be growing. Ernst Welteke, a member of the ECB council and president of Germany's Bundesbank, today suggested that weaker growth and inflation may favor lower borrowing costs. ``The weakening outlook for growth this year and next leads us to expect that inflation rates will come down, and the ECB council will have to take that into consideration,'' Welteke told journalists in the German city of Marburg.
In the U.S., where consumer spending may grow at the slowest pace in more than nine years this quarter, the Federal Reserve cut its benchmark interest rate last week to a 41-year low of 1.25 percent. The decision should aid the U.S. economy through a ``soft patch,'' Fed Chairman Alan Greenspan said today. Declining stock prices, a slower-than-expected pickup in business spending and ``geopolitical risks'' are weighing on the economy, he said.
`Year of Challenges'
The euro fell on concern that Europe's economy is struggling to recover. The currency fell to $1.0067 by 2:59 p.m. New York time from $1.0130 at the prior New York close. European stocks fell, with the Dow Jones Stoxx 50 Index shedding 0.8 percent to 2435.68. Siemens AG, Germany's largest electronics and engineering company, expects this year to be ``a year of challenges'' amid declining business, Chief Executive Officer Heinrich von Pierer said in a faxed statement today. New orders fell 13 percent in the fourth quarter, the company said. In April the commission forecast growth this year of 1.4 percent and 2.9 percent in 2003. It has lowered its quarterly growth forecast five times this year. The region's economy grew 1.5 percent last year.
Faltering demand -- investment will contract this year as consumer spending increases by 0.6 percent -- coupled with the drop in stock markets and fear of war against Iraq has delayed the recovery, the commission said. ``The recovery is much slower than anticipated,'' the commission said. ``Only from the second half'' of 2003 ``is growth expected to gain momentum.''
Calls For Rate Cut
Executives from companies including Siemens, as well as politicians including Schroeder, have called on the ECB to lower interest rates. The ECB argues that failure to meet EU budget goals makes it harder for policy makers to reduce rates. ECB Chief Economist Otmar Issing said yesterday inflation will probably slow, suggesting he may support a reduction in interest rates as soon as next month.
While ``interest rate levels are conducive to growth,'' the commission said the benefits are being dented by the appreciation of the euro and the ``risk premium'' from that is making corporate borrowing more expensive. Those factors have ``mitigated the loosening of monetary conditions since the second quarter of 2002, shedding another light on the low level of actual interest rates,'' the commission said, suggesting it too would welcome a rate reduction.
Futures Suggest Cut Coming
Investors expect borrowing costs to fall in Europe by the end of the year, interest rate futures show. The yield on the three- month contract for December is 2.94 percent, compared with a money market rate of 3.17 percent. ``A slight interest-rate cut by the end of the year or early next year would boost confidence,'' said Axel Weber, a member of the panel of advisers to the German government known as the ``Five Wise Men.'' The German economy will grow 0.2 percent this year and 1 percent next, the advisers predicted in their annual assessment of the economy. Unemployment, which reached the highest in almost four years last month, will rise to 4.17 million next year from 4.06 million, they predicted. Schroeder's plans to scrap tax exemptions and raise social insurance costs for employers and workers are hampering the economy, the advisers said. ``Private consumption is pitiful this year,'' the report said. ``The increases announced in tax and social charges are undermining consumer confidence and eroding disposable incomes.''
Deficit Breaches
Germany will follow Portugal in breaching the EU's budget deficit limit of 3 percent of gross domestic product this year, facing an ``excessive deficit procedure.'' Both countries are forecast to overstep the threshold for two consecutive years, the commission said. Both are considering additional measures to reduce borrowing. In Germany the commission forecasts a deficit of 3.8 percent this year and 3.1 percent in 2003. Still, it has not taken account all budget-reducing measures announced by German Finance Minister Hans Eichel. Eichel said today he still aims to bring the deficit below 3 percent of GDP next year. Portugal will reduce its deficit from 4.1 percent of GDP last year to 3.4 percent this year, the commission said. The commission reserved its harshest criticism for France and Italy. The Italian budget gap of 2.4 percent is ``worrying'' considering the increase in debt to over 110 percent of GDP. France's budget deficit is expected to approach the ceiling next year, when the commission forecasts a budget shortfall of 2.9 percent. //www.quote.bloomberg.com