/www.bloomberg.com/ By Emma Vandore
Brussels, (Bloomberg) -- The European Central Bank and the European Commission said they may reduce their economic growth forecasts as the threat of a war in Iraq deters consumers and businesses from spending.
ECB President Wim Duisenberg, who 10 days ago said he expects growth to accelerate to near 2 percent to 2.5 percent by the end of 2003, said he no longer wants to put a date on that forecast.
It's ``highly likely'' that the ECB will ``have to revise down slightly our December prognosis'' for economic growth of at most 2.1 percent, he told the European Parliament.
The possibility of a war in Iraq has helped boost oil prices more than 25 percent since December, leaving consumers and executives with less money to spend or invest. That may further damage the economy of the dozen euro countries, which the European Union says probably grew at the slowest pace in almost a decade last year and may have shrunk in the first quarter.
``If outside factors continue to influence negatively the economy, keeping growth sluggish and preventing a faster transition to a recovery period, we would have to reconsider our basic estimates,'' said Greek Economy Minister Nikos Christodoulakis in a written statement after a meeting of European finance ministers.
The EU's current forecast is for 2003 growth of 1.8 percent.
`Immediate' Disarmament
EU leaders demanded ``immediate'' Iraqi disarmament at a meeting today. Weapons inspections ``cannot continue indefinitely in the absence of full Iraqi cooperation,'' a statement from the 15 leaders said.
``Ongoing geopolitical tensions'' over Iraq and ``further turbulence in the oil market could have a negative impact on economic activity throughout the world,'' Duisenberg told the European Parliament.
He urged European governments not to use the threat of a war in Iraq as an excuse to ease budget deficit rules. European deficits are widening as a stagnating economy erodes tax revenue and boosts welfare costs.
Under Europe's Stability and Growth Pact, countries using the euro must keep their deficits at or below 3 percent of gross domestic product. The commission, the EU's executive arm, has suggested the budget rules may be relaxed in case of war, allowing governments to boost flagging economies by increasing spending or cutting taxes.
Deficit Warning
``Will a war have consequences for government expenditure?'' Duisenberg asked. ``Very likely so. I would warn about one thing. It's far too early to use the threat of a war to put the rationale of the rules of the game in the Stability and Growth Pact under discussion.''
Duisenberg won backing for his position from Spanish Economy Minister Rodrigo Rato.
``I don't think that every time something happens in the world, we should change the stability pact,'' Rato said before a meeting of finance ministers from the euro region in Brussels.
Germany breached the EU's budget rules last year, with a deficit of 3.75 percent of gross domestic product. The economy probably contracted last quarter, the Bundesbank said today.
In an effort to comply with the rules this year, German Chancellor Gerhard Schroeder has been raising taxes and social insurance payments, measures executives say may further deter investment and hiring.
Euro's Gains
Recent gains in the value of the euro may hurt demand for European exports and slow the rate of inflation, Duisenberg said.
``The appreciation of the euro over recent months may contribute to damping export growth,'' he said. Combined with ``subdued'' economic growth, the currency's gains against the dollar will help push inflation below the bank's 2 percent ceiling, he said.
The ECB kept its benchmark interest rate at a three-year low of 2.75 percent on Feb. 6. Since then, policy makers from Ireland to Belgium have said the region's $7 trillion economy may expand less than they expected.
The euro has risen 23 percent against the dollar in the past year. The currency fell to 1.0720 per dollar at 11:28 p.m. in Frankfurt from 1.0792. Companies from Alcatel SA to Siemens AG say the increase is hurting demand for exports by making their products less attractive to customers overseas.
Slower export growth ``should be counterbalanced by the assumed recovery of the world economy,'' Duisenberg said, adding that the ``most likely scenario'' is for growth to gather pace in the second half of the year.
``There are still downward risks to the outlook,'' Duisenberg said. Interest rates remain ``appropriate to preserve a favorable outlook for price stability in the medium term,'' he said.