11/09/2000 08:55 - (SA) Europe glosses over threat of oil to crucial growth

Versailles, France  European finance ministers on Sunday expressed confidence that regional growth would survive high oil prices, but failed to silence concerns that this optimism could prove misplaced.

Ministers hoping to restore calm over the common currency stressed during a weekend of talks that European growth was robust and a strong euro justified by fundamentals.

But their accompanying demand that Opec take steps to reduce the price of oil to protect world growth appeared at odds with this view and underlined the vulnerability of the region's recovery.

Perceptions that European growth has peaked and inflation taken root have already been seized by foreign exchange markets as an excuse to savage the euro, which hit fresh lows last week.

French Finance Minister Laurent Fabius, speaking on Sunday before news that Opec had agreed to up output by 800 000 barrels per day, declined to say how much of an increase would satisfy Europe, where the high price of oil has sparked fierce protests.

FABIUS SENDS CLEAR MESSAGE ON OIL

But he said the message, delivered overnight to Opec, was unambiguous. "We said it clearly yesterday that output had to be increased by an amount that will lower prices very significantly," Fabius told a news conference.

European ministers on Saturday said that Opec must honour promises to keep oil beneath $28 per barrel in order to "preserve worldwide growth".

Oil prices and the weak euro have already forced euro zone inflation to 2.4%, which is well above the European Central Bank's target of two percent.

In response the bank has lifted interest rates six times since last November to curb further threats to price stability and remains vigilent.

ECB Vice President Christian Noyer repeated on Saturday that the bank was attentive to the threat that consumer inflation might feed price expectations and encourage higher wage claims.

"We do not say we want to counteract this immediately. We are forward looking, focused on the medium term," Noyer told a news conference. "We are committed to ensure that growth will remain non-inflationary."

Analysts fear that if the twin blow of oil prices and the weak euro are not reversed, the ECB will have to take further rate action which could squander hopes for prolonged regional growth which are seen as the best in a decade.

Unemployment levels, although high compared with the United States, are coming down and governments like Germany and France are making the most of the recovery to cut taxes. But gains could prove short lived.

GDP FORECASTS ROBUST, BUT CONCERNS MOUNT

Italy, Sweden and Germany all stressed that the trebling in world oil prices in the last two years would not blunt their forecasts for growth this year.

But Bank of Italy chief Antonio Fazio warned that upbeat predictions that the country could grow by 3.1% in 2000 could prove out of reach, although an official forecast for 2.8% growth should be alright.

Spanish Economy Minister Rodrigo Rato took the same line.

"Oil prices...could have an impact on growth, even if this is not the case at present," he said, adding that the more immediate risk was in terms of the inflationary pressure which high imported oil costs could trigger in Europe.

This was also highlighted by European Economics Commissioner Pedro Solbes, who said a forecast that euro zone inflation would average 1.8% this year would need to be revised.

Although European inflation remains almost a full percentage point beneath that of the United States, the region has failed to deliver the same pace of growth, hobbling the euro as investors seek richer pickings elsewhere.

http://news.24.com/News24/Finance/Economy/0,1466,2-8-25_909894,00.html

-- Martin Thompson (mthom1927@aol.com), September 11, 2000