European economic outlook : general report presented at the AIECE meeting in Paris, May 9 - 11, 2001

For the meeting of the Association d'Instituts Européens de Conjoncture Economique (AIECE) in May, Klaus-Jürgen Gern, Christophe Kamps, and Joachim Scheide prepared the General Report. It is now published as Kiel Discussion Paper 376/377 and supplemented by the country notes of other AIECE institutes from all over Europe. The authors analyze the economic situation in the United States, in Japan, and in the emerging market economies and discuss the short-term forecasts for EU countries and those in Central and Eastern Europe.¤ In Western Europe, growth is forecast to continue at rates slightly above 2.5 percent, which may be around the sustainable rate of output growth. In the euro area, monetary policy is currently faced with the fact that headline CPI inflation is stubbornly high and that core inflation is gradually accelerating towards the upper limit of the ECB target range. Notwithstanding, the majority of AIECE institutes feel that the ECB's policy stance is too tight and expect interest rate cuts in the near future ranging from 25 to 100 basis points. By contrast, the monetary policy stance in the countries outside EMU is considered more or less adequate. This year, demand in Western Europe will be supported by fiscal stimulus in a number of countries. In the euro area, tax cuts have been implemented that amount to around 1 percent of GDP. As there are no counter measures on the expenditure side, a consolidated budget deficit of 0.8 percent in relation to GDP is expected by the AIECE institutes. This deficit follows a surplus of 0.3 percent last year, which was, however, heavily influenced by large one- off revenues. As concerns the medium-term fiscal strategy, many institutes note that governments will not be able to meet the deficit targets laid down in their latest stability programs, mainly due to overly optimistic growth assumptions. Central and Eastern European accession countries are expected to experience a robust growth