EU inflation to ease as crisis bites

Brussels — Inflation in the European Union is set to fall sharply thanks to lower oil prices, giving countries such as Poland and the Baltic states a better chance of joining the euro, the EU’s top economist said Monday.

"Commodity prices are more likely to fall — on the back of deteriorating growth prospects and weaker demand coming from emerging countries," said EU Economic and Monetary Affairs Commissioner Joaquin Almunia. "This would ease inflationary pressures."

According to economic forecasts, released Monday by EU’s executive, the European Commission inflation in the 27 member bloc is set to fall from 3.9 percent this year – the highest figure in seven years – to 2.4 percent in 2009 and 2.2 per cent in 2010.

Inflation in the countries which use the euro should fall from this year’s 3.5 per cent to 2.2 per cent, the figure it has held since 2002, in 2009, and then drop to 2.1 per cent in 2010.

That should be good news for European households, who will see recent steep declines in their purchasing power level off.

And that, in turn, should prevent any knock on effects on the wider economy by limiting workers’ demands for inflation busting pay rises, Almunia said.

The forecast figures are based on the assumption that oil prices in 2009 will average 85.7 dollars per barrel, which is far below this year’s peak of close to 150 dollars. Real prices could well fall below those levels, Almunia stressed.

While the figures come amidst deepening economic gloom, with EU growth set to fall almost to nothing in 2009, they offer some hope to EU newcomers from Central and Eastern Europe who have so far been unable to join the euro because their inflation levels were too far above the EU average.

Latvia’s inflation, for example, is set to fall from a dizzying 15.7 percent this year to 8.2 percent in 2009 and 4.7 percent in 2010, while Poland’s should fall from 4.3 percent to 2.6 percent.

"This is good for the euro-area enlargement perspectives of some of the new member states," Almunia said. However, he emphasized that those countries should also make sure they abide by euro rules limiting public deficits to 3 percent of gross domestic product.

According to the same set of forecasts, seven EU governments are set to breach that limit in 2009: Ireland, France, Latvia, Lithuania, Romania, Britain and Hungary.

With the addition of Slovakia, the euro area is set to grow to 16 member states in 2009. Poland has indicated it would like to join the common currency area in 2012.

DPA/Expatica