BBC News | BUSINESS | Europe faces economic slowdown

The International Monetary Fund (IMF) has warned that Europe will find it difficult to avoid a sharp economic slowdown, as it is hit by the tech sector collapse, weak consumer demand and the aftermath of the terrorist attacks in the USA.

In the World Economic Outlook, published twice a year, the IMF experts warn that risks of a sharper downturn have been "increased by the 11 September terrorist attack, particularly if the global recovery is slower than expected or consumer confidence continues to weaken".

Among Western European countries, Germany and Italy are singled out for their weakening economies.

In Eastern Europe, meanwhile, the boom of the year 2000 is fizzling out, cutting growth by half.

And the IMF says that Europe will have to rely more on its own efforts to beat the slowdown, and hints that further interest rate cuts by the European Central Bank may be necessary.

And it warned that European countries should allow their automatic fiscal stabilisers to cushion the downturn and not tighten their budgets, despite the requirements of the "stability pact" that applies to countries which use the euro.

Tech trouble

According to the IMF, Western Europe is plagued by a raft of difficulties.

Higher oil and food prices have pushed up inflation and squeezed real incomes.
The downturn in the technology sector is hurting industry, especially in Finland, Ireland, Sweden and Germany.
The slowdown in the United States and Asia is felt more and more.
The rate of unemployment has stopped falling.
And the terrorist attacks in the US undermine consumer confidence.

Eurozone tops USA and Japan

The report identifies Germany and Italy as the countries with the weakest economies.

France, which "initially appeared to be holding up relatively well against the global slowdown" has now been caught in the downdraft as well.

Greece, meanwhile, is likely to record robust growth, while for Ireland "the global slowdown has - somewhat fortuitously - helped to reduce the danger of overheating".

And the report notes that, despite the problems, the 12-country eurozone is expected to record the highest growth rate of the world's three big currency areas, easily outpacing the United States and Japan - 1.8% in 2001, rising to 2.2% next year.

Call for reforms

To fight the "relatively disappointing growth performance of the euro area", the IMF calls for

more structural reforms of labour markets,

an overhaul of pensions, tax and benefit systems

more flexibility for its "stability pact", which sets strict spending targets, regardless of the overall economic situation.

For the UK, the IMF notes that buoyant consumer demand did prop up the economy, but warns that interest rates will have to come down if consumer confidence fades or exporters run into more trouble.

Norway's economy, meanwhile, is still coasting, fuelled by the recent boost of high oil prices

Oil trouble for Russia

But as the global economic slowdown has cut back demand for fuel, prices have come down.

This is a particular threat to another European oil producer, Russia, which stands to lose an important source of income.

During the past couple of years, the country has managed to record balanced budgets and trade balance surpluses.

Inflation is creeping up, though, and the IMF warns that interest rates may have to go up again.

Economic growth in Russia is forecast to come in at 4.3% during 2001 - just half of the previous year's rate.

Other countries that once were part of the Soviet Union are expected to see similar declines, with a growth rate of 4.4% - down from 7.9% in 2000. Their economies will count on continuing "strong import demand from Russia".

The Baltic states - Estonia, Latvia and Lithuania - are the exception.

But their "relatively robust" economies are now much more intertwined with Western Europe than ever before. This will make them particularly vulnerable to a slowdown there.

Cutbacks in imports by countries like Germany is expected to hit other Eastern European countries as well

Turkey mars statistics

The statistics for economic growth in the region - sharply down to 1.1% this year - has been skewed by the near-collapse of the Turkish economy.

While other countries will see their economies weaken "moderately", Turkey has seen its currency plunge, its stockmarket plummet and its industries suffer.

Worst off is Poland, where government spending could spin out of control.

The IMF reserves rare words of praise for the government of just one country - Yugoslavia.

The organisation paints a bleak picture of Yugoslavia's economy, "which faces an enormous task of economic reconstruction and a crushing burden of external debt.

But it lauds the government's "impressive speed and commitment" to reform and stabilise the country.

Inflation is going down, after peaking at 100% at the end of last year, but the IMF warns that much remains to be done, and "it will be critical that the momentum of reform is sustained".


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