LISBON, Oct 10 - The euro zone economy appears to be on track for recovery as rate cuts over the past year kick in, European Central Bank Vice President Lucas Papademos said in a newspaper interview on Friday. His comments were echoed by Belgian National Bank governor Guy Quaden who was cautiously optimistic saying a recovery had become more likely but oil prices and a strong euro still presented risks. The comments came a day after their ECB colleague, Bundesbank president Ernst Welteke, said Germany, the biggest euro zone economy, was "now at the point where we are leaving the trough". The 12-nation bloc has lagged the U.S. and Japan in shrugging off a period of slow growth which has gripped the world since the end of the late-90s boom. It contracted by 0.1 percent in the second quarter.
Papademos said in an interview with Portuguese business weekly Semanario Economico that the impact of 1.25 percentage points in ECB interest rate cuts since December 2002 would be more visible in coming months and in 2004. "There are various encouraging signals that economic recovery will take place in the second half of this year and that economic activity will strengthen even more in 2004," he said, echoing official ECB projections. "We do not have what we would call concrete indicators to confirm this, but in general we are confident that recovery, which has been put off for some time, is now under way." Papademos, repeating what the ECB said when it opted to keep interest rates unchanged on October 2, said there were as many downside risks to the economic outlook as upside ones. But he added, "We do not exclude the possibilities of being positively surprised in the coming months." Quaden told Belgian financial daily L'Echo "a gradual recovery has become more likely" while issuing his caveats about higher oil prices or too strong a rise of the euro. However, he said, "The second (risk) reduces the first. One of the good things of the strengthening of the euro is that it curbs import prices," he said. The euro has risen sharply against the dollar in recent days, reaching levels close to its all time high around $1.1930 as fears have grown about Washington's ability to finance its rocketing current account deficit. "One should not dramatise the rise of the euro...What is not desirable is a too abrupt appreciation," Quaden said.
STABILITY PACT
Sluggish growth has increased the difficulty of euro zone heavyweights Germany and France in curbing their budget deficits to bring them back within EU limits of three percent of gross domestic product. EU finance ministers meeting in Luxembourg earlier this week gave a sympathetic hearing to French minister Francis Mer when he explained how France was addressing the problem, raising speculation Paris will avoid a possible fine for its breach. But Quaden said the French and German deficits did not favour growth and reduced confidence, and financial sanctions should not be excluded against countries which violate the EU's Stability and Growth Pact. "Firstly, I think you have to exploit all the flexibilities entailed in the pact. Secondly, we have to hope Germany and especially France will take up stricter commitments, additional measures," Quaden said.
"And thirdly, one should not exclude applying sanctions, because the risk of contagion is enormous, not only for the member states which attempt to respect the rules but also for the candidate member states". Papademos also called on EU states to adhere to the rules, saying that in the medium to long term, solid budget policies will help to improve the economy. However, when asked about providing flexibility for some countries over the Stability Pact, he replied: "We're going to wait and see. I don't think we should discuss this at present." "In any case, the criteria and principles of the Stability Pact should be applied in the same way to all countries." //