The Organisation for Economic Co-operation and Development predicts, in its end-year economic outlook, that none of the key members of the euro will have a government budget deficit below the 3 per cent limit set out in the Maastricht Treaty by 1997, the decisive year. It praises the progress most continental European countries have made in reducing government budget shortfalls, but reckons only a few smaller members are likely to make it below the ceiling.
Although recovery in the EU economies will be modest thanks to these efforts to cut government borrowing, the organisation says the outlook for the industrial economies is one of balanced growth and low inflation.
In particular, it expects the US to grow by almost as much next year as in 1996 with barely any increase in inflation and only a small rise in interest rates. The report lends support to what financial markets have dubbed the "Goldilocks scenario", an economy that is neither too hot nor too cold.
Japan is the one significant case where the OECD expects the pace of growth to slow. Canada is likely to be the fastest-growing of the big industrial economies in 1997/98, followed by the UK.
In the case of Germany, yesterday's report says: "On the assumption of a sufficiently supportive monetary stance, the Maastricht fiscal deficit criteria will be met if all the government's proposed measures are implemented." But the forecast puts the deficit at 3.4 per cent of GDP in 1997, just outside the limit.
It forecasts a 3.2 per cent deficit in France, commenting that meeting the treaty's target "depends not only on the resolute implementation of fiscal consolidation plans, but also on the likely course of interest rates".
The speed with which countries succeed in moving towards the Maastricht limits will determine how sluggish the EU economies are next year. The report foresees the recovery as being "relatively modest" because of efforts to close the gap between government spending and revenues. It predicts that unemployment rates on the Continent will scarcely budge from their current high levels.
Even so it expects both the main European economies to grow faster next year than this, admitting that their performance in 1996 has been sluggish. Investment and exports are likely to recover during the next 12 months. Low interest rates and a tight fiscal policy should permit faster growth without the threat of inflation.Reuse content