Commissioner Joaquin Almunia says governments must take advantage of expanding economies

It raised its prediction for growth in 2007 to 2.4% from 2.1%, although this is still down from 2.7% in 2006.

The inflation forecast has been lowered from 2.1% to 1.8%, compared with last year's figure of 2.2%.

The Commission attributed the fall in inflation to productivity, competition and the stronger euro.

European Economic and Monetary Affairs Commissioner Joaquin Almunia urged European governments to "make use of these good economic times to pursue sound public finances and structural reform".

The Commission warned that if wages grow faster than productivity then there might have to be more interest rate rises from the European Central Bank (ECB).

Earlier this month, the ECB kept its key interest rate on hold at 3.5% but hinted that rates may go up next month.

ECB President Jean-Claude Trichet said at the time that "strong vigilance" was needed to avoid "risks to price stability", comments that analysts took as indicating eurozone rates were likely to rise to 3.75% in March.