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April 26, 2001

Slower Growth Seen in Europe, Held Back by German Woes

By PAUL MELLER

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BRUSSELS, April 25 Acknowledging that the slowdown in the United States will retard European economic growth after all, the European Commission cut its 2001 forecast for growth in the 12 nations adopting the euro currency by 0.4 percentage point today, to 2.8 percent. The commission said it expected a slight uptick in 2002, to 2.9 percent.

Pedro Solbes, the economic and monetary affairs commissioner, said the negative impact from the United States was modest so far, but the commission warned in a statement that there could be "a reaction beyond a mere limited growth pause" in Europe if the situation in the United States grew any worse.

The commission said it expected Germany, the largest of the 12 euro- zone economies, to slow the most, to 2.2 percent this year from about 3 percent in 2000.

Mr. Solbes said the German economy was much more exposed to the United States than its 11 euro-zone neighbors. And it is in shakier fiscal shape than its partners: relative to the size of the economy, Germany's budget deficit this year is expected to be the largest in the European Union, at 1.7 percent of gross domestic product. Mr. Solbes said tax cuts made necessary by tepid economic conditions and other factors were responsible for the growing deficit, but he added, "This has to be temporary and must be reversed in 2002."

The commission's report foresaw average inflation of 2.2 percent this year in the euro zone, slightly above the European Central Bank's target of 2 percent, but it forecast a fall to 1.8 percent in 2002. Unemployment was seen falling from about 8.9 percent in 2000 to 8.5 percent in 2001 and 7.9 percent in 2002.

Analysts said the rosy inflation forecast was optimistic and perhaps meant to push the bank to cut interest rates. "Our methodology does give rise to more optimistic results than other institutions," Mr. Solbes acknowledged. "But often these are closer to reality."

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